For disabled persons receiving financially-based government benefits, supplemental needs trusts ("SNTs") can safeguard benefits and serve as an effective estate planning tool. SNTs allow individuals with disabilities to retain funds received from an inheritance or gift without eliminating or reducing any government benefits that they may be receiving, typically, Medicaid or Supplemental Security Income ("SSI"). Sometimes the individual with a disability is vulnerable to exploitation or not able to managed finances independently. By placing the gift or directing the inheritance to an SNT, the disabled individual has an assured source of supplemental funds that can be used to pay for goods and services not covered by their government benefits. Without using an SNT in place, any unexpected receipt of funds directly by the disabled individual could result in a reduction or complete loss of benefits.
While the creation and funding of an SNT has no effect on the disabled individual's eligibility for government benefits, care must be taken to ensure distributions from the SNT are allowable and appropriate depending on the benefits involved. Individuals who receive SSI have much stricter rules regarding use of SNT funds that individuals in receipt of Medicaid only or Social Security Disability benefits and Medicaid. (Social Security Disability is not based on financial need whereas SSI benefits are.)
Generally, the trustee of an SNT is permitted to make such distributions to third parties to meet the disabled individual's needs that are not already being met by their government benefits program. Examples of these distributions include: personal care items, transportation (including purchase of a vehicle), entertainment, computer equipment, phone and cable services, and for some, purchase of a home, payment of rent, special medical or therapeutic equipment, and medical care. However, distributions of cash from an SNT CANNOT be made directly to the disabled individual. Payment for such items/services MUST be made directly to the service provider, retailer, or vender solely for the benefit of the disabled individual.
SNTs can be established and funded using either the disabled individual's own funds or by a third party (often a relative) for the benefit of the disabled individual. When an SNT is funded using the disabled individual's own funds, it is considered a "self-settled" SNT. Self-settled SNTs can be useful in situations where a disabled individual inherits money or property outright, receives a court settlement, or where a person without a prior disability owns assets in their name and becomes disabled and requires needs-based public benefits. When someone other than the disabled individual funds the SNT (i.e. a parent, family member, or friend of the disabled individual) it is considered a "third-party" SNT. Third party SNTs are most commonly created as part of an estate plan to ensure that the disabled loved one has supplemental funds to provide for their needs and to preserve assets to go to other family members when the disabled individual dies.
The most important difference between self-settled and third party SNTs is that a self-settled SNT must contain a "payback provision," meaning that any funds left in the trust after the beneficiary dies must be paid back to the state Medicaid agency for assistance provided. Third party SNTs, however, do not need to contain a payback provision and allow remaining trust assets to pass to the residuary beneficiaries designated in the trust instrument upon the death of the disabled individual. Many clients choose to create "standby" SNTs as part of their planning to protect their loved ones in advance, just in case a disability strikes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.