Special Needs Trusts
A special needs trust provides a way for a person with a disability to receive financial support while remaining eligible for needs-based government benefits like Medicaid or Supplemental Security Income (SSI). This publication defines important terms related to trusts, explains how a special needs trust preserves SSI and Medicaid eligibility, describes different kinds of special needs trusts, suggests ways to find an attorney to set up a trust, and discusses how to deal with some potential problems that may arise.
Important terms related to special needs trusts
- Trust: A trust is an arrangement in which someone's property or money is legally held or managed by someone else or by an organization.
- Beneficiary: A beneficiary is the person for whom a trust is established.
- Trustee: A trustee is a person, bank, or other entity that manages a trust for the beneficiary.
How does a special needs trust preserve SSI and Medicaid eligibility?
In Washington State, a person who receives SSI and Medicaid is only allowed to have resources up to $2000. If the person’s resources go over $2000, the person generally loses SSI and Medicaid benefits.
The calculation of “resources” for purposes of SSI and Medicaid is complicated. In general, the government may consider the following things resources:
- Bank accounts, savings bonds, stocks
- Real property (except for the land on which your home sits)
- Other assets that could be sold to pay for food or housing.
Examples of items the government may NOT consider as resources are:
- A beneficiary’s home
- One vehicle if it is used for transportation
- A burial plot or fund
- Household goods and personal effects.
If a person with SSI and Medicaid has resources under $2000, but receives a large inheritance or legal settlement, the person may lose his or her benefits. When money or other assets are placed in a special needs trust, however, the beneficiary can keep the assets without losing the government benefits.
What can funds from a special needs trust be used for?
Funds from a special needs trust cannot be used to pay for items that Medicaid and SSI cover, like housing and medical care. However, money from a special needs trust can be used to pay for things like furniture, education, transportation, entertainment, travel, and out-of-pocket medical and personal care expenses. When a trustee pays expenses directly to a third party instead of to the beneficiary, the money should not count as earned income and thus should not impact the beneficiary’s benefits.
What are the different kinds of special needs trusts?
Special needs trusts generally fall in two categories: self-settled and third-party-settled. The difference between these two types of trusts is whose money and assets are being used to fund the trust. Another type of special needs trust is a pooled trust, which may be self-settled or third-party-settled. There may be tax implications associated with creating each kind of trust, so an attorney should always be consulted when creating any kind of special needs trust.
1. Self-settled special needs trusts
A self-settled special needs trust is one in which a person with a disability places his or her own assets into the trust. Federal law allows for two types of self-settled trusts to protect Medicaid and SSI eligibility. One is called a “(d)(4)(A) trust” and the other is a pooled trust (explained in number 3 below).
A person with a disability under age 65 may place assets in a “(d)(4)(A) trust” to preserve Medicaid or SSI eligibility. Even though the trust is created with the beneficiary’s own funds, the trust may not be established by the beneficiary. It must be established by a parent, grandparent, guardian, or a court. The beneficiary cannot be the trustee of a self-settled special needs trust. The trustee should have sole discretion to determine what distributions are appropriate.
A “(d)(4)(A) trust” contains a “payback provision,” which means that any money left in the trust after a person dies must be used to reimburse the government for Medicaid benefits the person received before any money can pass on to the person’s heirs.
2. Third-party-settled special needs trusts
A third party, like a family member or friend, may fund and establish a trust for a person with a disability. By establishing a trust, the funds provided by the third party will not be counted as resources for the purposes of SSI and Medicaid benefits. The beneficiary of a third-party-settled special needs trust cannot administer the trust. The trustee must have sole discretion to determine what distributions are appropriate. After a beneficiary dies, there is no “payback provision” for third-party-settled special needs trusts.
3. Pooled special needs trusts
A pooled special needs trust is created and managed by a nonprofit organization that acts as trustee. A separate account is maintained for each beneficiary of the trust, but the funds in the trust are pooled for investment purposes. An individual account in a pooled special needs trust may be established by a parent, grandparent, guardian, court, or the individual with a disability. A person with a disability can be any age when the account is opened in a pooled trust, although there will be a penalty imposed if the beneficiary is over age 64. After a beneficiary’s death, the individual’s trust funds will either remain in the trust to benefit other beneficiaries or will be used to reimburse Medicaid for the beneficiary’s lifetime benefits (“payback provision”).
An example of a pooled trust is the Washington State Developmental Disabilities Life Opportunities Trust. This trust is available only to people who are Washington residents under age 65 and who have a “developmental disability” as determined by the Developmental Disabilities Administration. The Life Opportunities Trust gives people the option of establishing a self-settled trust or a third-party-settled trust. The State may provide matching funds for an individual account in the Life Opportunities Trust. For more information about the Life Opportunities Trust, contact:
Developmental Disabilities Life Opportunities Trust
c/o The Arc of Washington State
2638 State Ave. NE
Olympia, WA 98506
How do I find an attorney to help me?
Because trusts can be complicated, an attorney should draft the documents establishing the trust. A person may want to contact a local county bar association’s lawyer referral service to find an attorney who specializes in trusts. Bar associations with lawyer referral services are:
- King County: (206) 267-7010
- Kitsap County: (360) 373-2426
- Lewis County: (360) 748-0430
- Pierce County: (253) 383-3432
- Snohomish County: (425) 388-3018
- Southwest Washington (Clark, Cowlitz, Skamania, Wahkiakum): (360) 695-0599
- Spokane County: go to www.spokanebar.org and click on “Online Lawyer Referral.”
What can a person do if he or she suspects a trustee is not acting in a beneficiary’s best interests?
When a person agrees to become a trustee, that person assumes a fiduciary duty. This duty requires that the trustee act in the best interest of the trust beneficiary and not in the trustee’s own self-interest. A trustee can be sued for violating his fiduciary duty.
Washington State Adult Protective Services may investigate financial exploitation of adults with disabilities. For more information on reporting financial exploitation, call 1-866-END-HARM or visit the DSHS Abuse Reporting webpage.
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