Which special needs trust is the right fit?

Posted on July 22, 2019

People with special needs have a variety of financial planning tools available to help them protect their government benefits eligibility and their income. One of these tools is a special needs trust, which allows those who are classified as disabled to access the proceeds of a settlement they may have while keeping needs-based government benefits like Medicaid and Supplemental Security Income (SSI). 

There are two main types of special needs trusts, both of which can be funded with the beneficiary’s assets. Each comes with its own set of guidelines, which we have broken down below.

Self-Settled Trust: (d)(4)(a)

Eligibility & Establishment

This type of trust can be established for people under age 65 who are considered disabled by the Social Security Administration (SSA) or State Medicaid Agency standards. The beneficiary, parent, grandparent, legal guardian, or court must establish the trust.

Conditions

Assets can only be used for goods and services that benefit the disabled individual. 

The trust must contain a payback clause to reimburse the state for Medicaid benefits paid during the beneficiary’s lifetime. Upon the death of the beneficiary or termination of the trust, Medicaid is reimbursed. The trustee is responsible for paying the last expenses of the beneficiary and distributing the remaining assets in accordance with the trust agreement.

Pooled Trust: (d)(4)(C)

Eligibility & Establishment

This type of trust can be established for people under age 65 who are considered disabled by SSA or State Medicaid Agency standards.

A non-profit entity (as defined in § 501(c) of the Internal Revenue Code) that has tax-exempt status under IRC § 501(a) must establish the pooled trust. The grantor, meaning the individual entering into the trust agreement, will sign a joinder agreement to “join” the pooled trust. The terms of the trust are set forth in a master trust agreement.

Conditions

Distributions from the trust are solely for goods and services that benefit the disabled individual. Distributions are paid by the trustee directly to the provider of the goods and services to ensure SSI and Medicaid do not count them as assets or “resources.” 

The trust must maintain separate accounts for each trust beneficiary, but the funds are “pooled” for purposes of investment management. An individual’s parent, grandparent, legal guardian, or the court may place funds in the trust. Any funds that remain in the account upon their death may be retained by the trust. The funds that are not retained typically must reimburse the state for Medicaid assistance. After Medicaid is paid back, any remaining amount will either be absorbed by the trust or provided to the beneficiary. The joinder agreement will outline these terms.

Need to Know More? Call Us.

A special needs trust can serve as an effective tool for managing the funds of a person with special needs. If this planning tool is the right option for you, it’s important to know the rules that govern Medicaid in your state, as they may affect how efficiently the trust will work in your individual situation. We welcome you to give Milestone a call. One of our experts would be happy to answer your questions and help you get on track for smart planning for yourself or your loved one.