Trust options can provide income for the elderly or persons with disabilities without jeopardizing Supplemental Security Income or Medicaid.
Trusts are popular tools in financial and estate planning because they can help protect and manage assets for a variety of purposes. A special or supplemental needs trust (SNT) is a specific type of trust that focuses on providing financial support to elderly or disabled persons. An SNT can supplement their standard of living without jeopardizing the government benefits they receive.
There is more than one type of special needs trust. They can differ in their funding source, set up, administration, and taxation, but the common purpose is to contribute to and enhance the beneficiary’s quality of life.
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Maintaining SSI and Medicaid
Elderly and disabled individuals often receive a number of government benefits including Supplemental Security Income (SSI) and Medicaid. These are both “means-tested” programs, meaning that a person’s income and assets are considered when determining if he or she qualifies.
If property is given outright to the individual, that additional income or assets could put him or her over the program’s qualification threshold. The requirements for Medicaid vary by state, while SSI is a federally regulated program. They both restrict asset transfers to others and/or trusts, but there is an exception carved out for SNTs.
Instead of a direct transfer, an SNT can be set up for an individual’s benefit and structured in such a way that the trust assets aren’t taken into account for purposes of government program qualification. This planning can be appropriate for individuals currently receiving benefits or for someone who may need benefits in the future.
| What a special needs trust can pay |
|---|
| Certain medical treatments not covered by Medicaid |
| Travel and special transportation |
| Personal items |
| What a special needs trust cannot pay |
|---|
| Generally, cannot be used for food, shelter, clothing, or other benefits provided by any governmental assistance program. |
First party special needs trust
A first party SNT, also known as a “self-settled trust,” is funded with assets or income that belongs to the beneficiary. These trusts are commonly funded with inheritance or proceeds from a personal injury lawsuit.
This type of SNT is an irrevocable trust that must be established when the beneficiary is under age 65. It must provide that Medicaid be reimbursed upon the beneficiary’s death or trust termination, whichever occurs first. No payback is required for SSI benefits received during the beneficiary’s lifetime.
A parent, grandparent, legal guardian, or a court, must establish a first party SNT, and it can have only one beneficiary.
First party SNTs are usually taxed as grantor trusts since the beneficiary (grantor) retains interest in the assets he or she transfers to the trust. With a grantor trust, the beneficiary is taxed on the income of the trust versus the trust paying the tax.
Pooled trust
A “pooled trust” is another type of first party SNT that can be established by the beneficiary, but the trust is managed by a nonprofit organization as a sub-account with the accounts of many other beneficiaries. There is no age restriction on a pooled trust, and it contains modified Medicaid payback provisions.
At the beneficiary’s death, the remaining assets in this type of trust may be used by other beneficiaries in the pool. A pooled trust may be desirable when the beneficiary doesn’t meet the requirements of a first party SNT and doesn’t want to incur the administrative costs.
Third party special needs trust
These trusts are funded with assets that belong to someone other than the beneficiary, including gifts and distributions from the estates of parents or grandparents and life insurance policies that name the trust as a beneficiary. Anyone besides the beneficiary can create a third party SNT and the trust can have multiple beneficiaries.
Beneficiaries do not need to be disabled to have a third party SNT. There is no Medicaid payback requirement if the trust is administered appropriately. The trust document must include a spendthrift provision, which protects the beneficiary from creditors.
Third party SNTs can be established under a will (testamentary) or during the grantor’s lifetime (inter-vivos).
A third party SNT may be taxed as a grantor trust or a complex trust depending on its specific provisions. If the trust is testamentary or irrevocable and taxed as a complex trust, it could qualify as a qualified disability trust (QDT). This is a preferential designation that provides an income tax benefit with a higher-than-usual exemption. For 2016, a QDT has an exemption of $4,050 instead of $100 for a typical complex trust.
Distributions from an SNT
Most distributions from special needs trusts are made as “in-kind” distributions to prevent the beneficiary from receiving cash. Cash distributions from the trust could be considered beneficiary assets and disqualify or reduce benefits from government programs.
ABLE accounts: A different approach to disability financial assistance
An ABLE account is not a trust, but it can serve as another vehicle for providing financial assistance persons with disabilities. Created by the Achieving a Better Life Experience Act of 2014 (ABLE), these state-managed accounts are modelled after 529 college savings plans to provide a way of saving in the name of the disabled beneficiary and allowing the funds to grow tax free. If certain conditions are met, the ABLE account funds will not disqualify the beneficiary from government benefits.
To be eligible for an ABLE account, the beneficiary must have become disabled prior to age 26. Aggregate contributions to the account cannot exceed the annual federal gift tax exclusion, which is currently $14,000. These contributions are not tax deductible and they are capped at each state’s limit for Section 529 accounts. Amounts in the ABLE account in excess of $100,000 may adversely affect the beneficiary’s eligibility for SSI benefits.
As long as ABLE account funds are used for government approved disability-related items, the account will continue to grow tax free. At the beneficiary’s death, there is a Medicaid payback provision similar to first party SNTs. Even though the funds in the account may have been contributed by someone other than the beneficiary, this payback provision still applies.
Although 2015 federal legislation allows states to create ABLE accounts, few have a plan operating at this time. Recent rule changes will allow a person to open an account in any state, since some states may choose not to create their own plans. Details, such as how to structure account setup and which financial institutions will participate, are still being determined.
The National Down Syndrome Society website has a list of the states that have provided updates of their ABLE programs. Included are Tennessee and Nebraska, which will launch programs in mid and late June, and Ohio, where STABLE accounts became available June 1.
How we can help
As you can see, there are several options for providing financial resources to elderly or disabled persons in a trust or savings account strategy that will not jeopardize the individual’s ability to receive government benefits. As an additional guard against income loss due to a disability, some also consider long-term disability insurance. Be sure to contact a qualified tax advisor and attorney to help you navigate the complex laws and regulations surrounding trusts and insurance products.