When you have a beneficiary who is receiving government benefits, including benefits that pay for medical care such as Medicaid, reimbursement for expenses through SSI, or benefits for housing such as section 8, whether they are eligible for these benefits will depend both on their disability and on the assets they own. Therefore, any assets they receive from others either by gift or by inheritance can make them ineligible to receive these critical benefits. We have seen children who are receiving medical care paid for through governmental benefits become ineligible for these benefits and stop receiving the medical care they need. Proper planning is essential so that a family member can gift assets during life and/or after death to a child who is receiving governmental benefits without jeopardizing these vital benefits. One of the main tools used by families is to create a “special needs trust” which is designed to supplement but not replace any benefits that a child would be receiving from the government. In this blog we will explain two types of special needs trusts that are commonly used in estate planning.
The first type of special needs trust, a third-party special needs trust is established and funded by someone other than the individual with a disability. This could be a parent, grandparent, sibling, or any other person who wants to provide for the future needs of their loved one. The assets in a third-party special needs trust do not belong to the individual with a disability and, therefore, do not affect their eligibility for government benefits. Using a third-party special needs trust, a family can proactively plan in such a way as to have any funds that they want to give during life or after death used to care for a person with special needs in a way that does not to affect their governmental benefits. At the same time, this trust ensures that any money that is remaining in the third-party special needs trust will go to other family members or loved ones and not to the government. We suggest all families that have special needs beneficiaries create third-party special needs trusts to maximize the benefits left to not only the special needs child, but to their family.
Unfortunately, most people do not have an estate plan and have not created third-party special needs trusts, resulting in the special needs beneficiary receiving a gift or an inheritance (in their name alone). At that point the special needs beneficiary will almost certainly become ineligible to receive any other government benefits because they have too many assets as a result of this gift. Based on this hardship, the government has allowed a first-party special needs trust, also known as a self-settled or (d)(4)(A) trust, which is funded with the assets of the individual with a disability. These assets could be received as a result of a personal injury settlement, inheritance, or other sources. These trusts can only be created by the special needs beneficiary (if competent), a parent, grandparent or by court order. The purpose of a first-party special needs trust is to allow the individual to retain their eligibility for government benefits while still utilizing their own assets for supplemental needs. It is important to understand that unlike a third-party special needs trust, when the special needs beneficiary of a first-party special needs trust dies, the trustee must pay back the state or federal government for any benefits that the special needs beneficiary received during life.
There is a huge distinction between third-party special needs trusts and first-party special needs trusts, as proactively planning using a third-party trust will not only protect the benefits for a special needs beneficiary but also ensure that assets remaining after the special needs beneficiary dies will remain with the family or loved ones rather than being paid to the government.
Please give our office a call if you or someone in your family may need assistance with planning for a family member who is receiving government benefits.