People with serious disabilities—either physical or mental—typically receive important government benefits that help provide for their basic needs, such as income replacement, health insurance, and special education. Some of the government programs that provide support to disabled persons, however, are based on financial need. Supplemental Security Insurance (SSI) provides a minimum level of income and Medicaid provides medical services to financially needy individuals. It is critical to structure payments or gifts to a person with disabilities very carefully to ensure that receipt of the payment or gift will not disqualify the person from receiving these benefits.
There are two types of trusts that can be used for the benefit of a person with a disability:
(1) A special needs trust is a trust created to hold the person’s own money or assets, including funds from the settlement of a personal injury lawsuit or of a claim against the Virginia Birth Injury Fund for injuries that created the disability.
(2) A supplemental needs trust, or third-party special needs trust, is typically created by parents or grandparents from their money and assets to be used for the benefit of their disabled children or grandchildren.
While a special needs trust must be created and approved by the Social Security Administration before it can be funded, supplemental needs trust can be created and funded at any time—as a revocable inter vivos trust, as an irrevocable inter vivos trust, or as a testamentary trust created in a will to receive the decedent’s residual estate. Most people create supplemental needs trusts as a separate inter vivos trust so that other family members (or interested parties) can make use of the trust in their own estate plans.
The primary difference between the two types of trusts, other than the source of funding, is that the funds remaining in a special needs trust at the time of the beneficiary’s death must be paid back to the government up to an amount equal to the total amount of medical assistance that the government has paid on behalf of the beneficiary. Assets remaining in a supplemental needs trust can pass on to the family of the trust’s creator.
Special needs trusts and supplemental needs trust are very different from ordinary trusts. A more typical trust gives the trustee the power to make distributions to or on behalf of the beneficiary for the beneficiary’s health, education, maintenance, and support. Limiting the trustee’s powers to these criteria ensures that the trust assets are protected from any potential creditors of the beneficiary, including the IRS. The focus of special needs and supplemental needs trusts is quite different. Because government disability benefits provide for the health, maintenance, and support of the trust beneficiary, the trust assets are used to pay for extras that can improve the quality of life of the person with the disability. In fact, if assets from the trust are used to pay for the beneficiary’s health, maintenance, and support, the beneficiary most likely will be determined ineligible for need-based government benefits.
While government benefits can help a disabled person meet basic income and medical needs, those benefits do not provide for extras that can make a substantial difference in a disabled person’s quality of life. Special needs and supplemental needs trusts can fill in that gap. Specifically, the trustee of a special needs or supplemental needs trust can make disbursements to pay for caregivers (including family members) and personal services, educational and vocational services, pets and pet supplies, travel and vacations, recreation, the purchase and maintenance of a car or van and the purchase of gasoline to operate the vehicle, and other such expenses. These “extras” can make the difference between mere subsistence and an enjoyable life.
Failure to make use of special needs or supplemental needs trusts can result in payments or gifts made to or for the benefit of a disabled person being used to satisfy only basic needs for which government benefits otherwise would provide. If not properly structured, receipt of personal injury settlements and well-meaning gifts and inheritances actually can operate to the detriment of the disabled person. Special needs and supplemental needs trusts are not required in every situation. It is essential, however, that anyone wishing to provide for a disabled relative or friend, as well as attorneys or other representatives pursuing personal injury lawsuits or negotiating personal injury settlements, consider and evaluate whether such a trust would be appropriate.
Amanda Shaw is an attorney with Glenn Feldmann Darby & Goodlatte – visit www.gfdg.com to learn more.