Supplemental Security Income (SSI), Medicaid, subsidized housing, and some other disabilities programs limit benefits to people with minimal assets (also called resources) and income. However, because disability benefits tend to afford only a bare bones lifestyle, families often want additional funds to be available to supplement disability aid. Unfortunately retaining ownership or access to money often disqualifies an individual for the very disability benefits that a disabled person needs to supplement. What is a family to do?
Supplemental Security Income (SSI), Medicaid, and various other disabilities benefit programs allow qualifying special needs trusts (also called supplemental benefits trusts or supplemental needs trusts) to supplement a disabled person’s government aid without disqualifying the special needs trust beneficiary from government programs to benefit disabled people. To qualify as a special needs trust, a trust must satisfy many requirements that are too technical and extensive to discuss here.
Nevertheless, it is important to be aware that many requirements that apply to a first party special needs trust do not apply to a third party (sometimes called estate planning) special needs trust. A third party trust is funded entirely by persons other than the special needs trust beneficiary or spouse. In contrast, a first party special needs trust contains amounts contributed in trust by the beneficiary or spouse or amounts that could have been paid to the first party special needs trust beneficiary or spouse if he/she had not instead wanted them paid into the first party special needs trust.
To qualify as a special needs trust, a first party special needs trust agreement (among other things) must say that when the special needs trust beneficiary dies, the first party special needs trust will apply the then special needs trust balance to repay Medicaid expenditures for the special needs trust beneficiary. In other words, if a trust contains contributions attributable to the trust beneficiary or spouse, it is a first party trust and must provide for Medicaid payback or the trust will disqualify the beneficiary for Supplemental Security Income (SSI), Medicaid, and various other disability benefits.
Because third party special needs trusts are not funded by the trust beneficiary or spouse, they are not required to repay Medicaid or comply with various other rules applicable to first party special needs trusts. Nevertheless, if the trust agreement governing a third party special needs trust directs the third party special needs trust trustee to repay Medicaid and comply with other first party special needs trust requirements, the third party special needs trust will have to comply.
Unfortunately, some lawyers who claim to be knowledgeable in special needs trusts law include in third party trusts Medicaid payback requirements and other onerous provisions that are mandatory only for first party special needs trusts. These errors can cost families thousands of dollars for no good reason. Thus, it is crucial that whoever you choose to draft your special needs trust understand the difference between first party special needs trusts and third party special needs trusts.
At FriedmanLaw, we have counseled clients on special needs trusts for over twenty-five years. In fact, I received the New Jersey State Bar Association’s Distinguished Legislative Service award twice for drafting laws that help New Jersey families use special needs trusts. We look forward to working with you.