According to Medicaid.gov, over 70 million people are currently enrolled in Medicaid. And, as reported by the Social Security Administration, over 8 million receive Supplemental Security Income (“SSI”). Both Medicaid and SSI are “means tested,” which means recipients must have incomes and assets below a certain level. A recipient who obtains assets exceeding $2,000 if single and $3,000 if married becomes ineligible, which can pose a major threat to his or her financial stability and access to healthcare.
PRESERVING MEDICAID ELIGIBILITY WITH SPECIAL NEEDS TRUSTS
Although certain property, including a residence and inexpensive vehicle, is not counted, any substantial payment – whether from an inheritance, legal settlement, gift, or any other source – is potentially disqualifying. Of course, this doesn’t necessarily mean you can’t allocate assets for the care of a disabled loved one. It just means you have to be smart in the way you go about doing it.
Generally speaking, assets held in trust for a recipient’s benefit count toward the asset limit. If a trustee has the authority to pay out cash from a trust directly to the beneficiary, then the trust’s assets might as well be in the beneficiary’s own wallet as far as the Social Security Administration is concerned. However, funds held in a “Florida special needs trust,” a financial tool designed for the support of Florida Medicaid or SSI recipients, won’t jeopardize eligibility.
What is a Special Needs Trust?
A special needs trust, also called a “supplemental needs trust,” is a specific form of trust intended to support a disabled beneficiary while preserving access to means-tested programs. The trusts can be funded from lawsuit proceeds, bequests in a Florida last will and testament, gifts, or just about any other source, and trustees are permitted to make distributions for anything from educations to vacations. But the essential feature is that funds in the trust are used for the beneficiary’s support but not paid to him or her directly.
Special needs trusts come in two basic forms: third-party and first-party (also called “self-settled”). The source of the trust’s funding is the distinction between the two. If the grantor is someone other than the beneficiary, such as a parent leaving money in a will, then it’s a third-party trust. If the beneficiary provides the money – from lawsuit proceeds for instance – it’s a self-settled or first-party trust. First-party special needs trusts have tighter restrictions and usually require payment of remaining trust assets to the state upon the beneficiary’s death. This article primarily looks at third-party trusts, but self-settled special needs trusts can be a valuable tool in certain circumstances.
How Do Special Needs Trusts Work?
Special needs trusts do not have to be complicated. A grantor, commonly a parent or grandparent, executes a declaration of trust naming a trustee and setting terms for distribution of the trust’s assets. After the trust is up and running, the grantor transfers legal ownership of the assets to be held in trust (the “corpus”) to the trust itself. The process can be as simple as moving money from one bank account to another. With a testamentary special needs trust a/k/a Medicaid will, the trust is funded through a bequest in the grantor’s will. The grantor could also designate the trustee as a bank account’s POD beneficiary so that the funds transfer to the trust outside of probate upon the grantor’s death. Under current laws, you can even set up your own special needs trust.
Typically, the trust is funded with cash or other relatively liquid assets, though virtually any valuable property can be used to fund a special needs trust. So, for example, a parent could theoretically transfer the deed to a rental property to a special needs trust and direct the trustee to distribute rental income for the beneficiary’s education.
A special needs trust can permit distributions for specific items like medical expenses or can be more generally worded, allowing the trustee some latitude. The important thing is that the trust is created for the beneficiary’s “sole benefit,” so there cannot be any additional beneficiaries, and the trust’s purpose cannot be to reduce the grantor’s taxes or otherwise primarily benefit the grantor.
After a special needs trust is funded, the trustee, who can also be the grantor but cannot be the beneficiary, has complete discretion over distributions as long as they comply with the terms of the trust. The beneficiary cannot have any power to control the assets or force the trustee to make distributions that the trustee does not believe are proper.
Along with managing trust assets competently, the trustee has a duty to stay reasonably informed about the beneficiary’s circumstances and act in the beneficiary’s best interest. This includes avoiding disbursements that might impair Medicaid or SSI eligibility. Because distributions for basic necessities like food and shelter can qualify as “in-kind support and maintenance” and therefore count as income when determining eligibility, a trustee should carefully consider the nature of a distribution before disbursing funds.
A special needs trust terminates when the beneficiary passes away, the trust’s assets are depleted, or upon a date or event specified in the declaration of trust. The declaration should also state what happens with any remaining assets upon termination. Commonly, trusts are set up so that remaining funds revert to the grantor, but, of course, that is not possible with a testamentary trust.
Alternatives to Special Needs Trusts
When assets slated to be held in trust are insufficient to justify the expense of a single special needs trust, or if a self-settled trust is otherwise appropriate but the beneficiary doesn’t meet the legal requirements, a “pooled trust” (or “community trust”) can provide similar eligibility-saving advantages. A pooled trust is composed of funds contributed by numerous donors and administered collectively by a nonprofit organization. Structurally, it consists of one large “master trust” segregated into “sub-trusts” for each beneficiary, with appointed trustees making distributions for the various beneficiaries from their respective sub-trusts. The economy of scale involved in managing grouped assets makes pooled trusts a viable option in some scenarios in which a special needs trust would be helpful but is not practical.
Enacted in 2014, the Achieving Better Life Experience Act (“ABLE”) allows SSI or Medicaid beneficiaries to open savings accounts that are not included in eligibility calculations. The account-holder, who must have become disabled prior to his or her 26th birthday, has greater control over distributions than with a special needs trust, though funds can only be expended for “qualified disability expenses.” The accounts have a $15,000 annual contribution limit, and the means-test exemption is capped at $100,000. So, an account balance exceeding $100,000 is potentially disqualifying. ABLE accounts are a good option for family members of disabled individuals who want to gradually save for a loved one’s future support.
Remaining qualified is a high priority for any Medicaid or SSI beneficiary. And, when providing funds for the support of a disabled loved one, careful planning is the key to preserving eligibility. Whether you plan to use a special needs trust or an alternative tool, an attorney with experience in SSI and Medicaid matters can assist you in providing for your loved one’s future care without jeopardizing vital benefits.
Steve Gibbs, Esq.