By Attorney Suzanne R. Sayward (May 2011)

Individuals with disabilities may require care that is not covered by health insurance and which can be very costly. In addition, a person with disabilities may not be able to earn a living to pay for such care. There are governmental benefits available to individuals with disabilities that provide support and medical care. Some of these governmental benefits programs are needs-based, meaning that in order to qualify for the benefits, the individual’s income and assets must be below the program limit.

For parents who have a child with special needs and for individuals with disabilities, ensuring eligibility for governmental benefits is crucial. A Special Needs Trust, sometimes called a Supplemental Needs Trust, can be an excellent tool for parents of a special needs child and for people with disabilities to protect needs-based governmental benefits. Here are five facts to know about using a Special Needs Trust as part of your estate plan.

1. Supplemental Security Income (SSI) and Medicaid are needs-based governmental benefits.
The SSI program makes monthly payments to eligible individuals for the purpose of providing funds for basic necessities such as food, shelter, and utilities. In order to be eligible for SSI, a person’s income must be less than the monthly benefit amount. In addition to the income limitation, the SSI program imposes a limit on the amount of assets a beneficiary may have. An eligible recipient may not have more than $2,000 of countable resources. The amount of the monthly benefit will vary depending upon the individual’s living arrangements and income. In 2011, the maximum federal SSI benefit for a single person is $674. Many states, including Massachusetts, supplement the federal benefit.

Medicaid is a state and federally funded program that pays for medical care for individuals whose income and assets fall within the program limits. For most types of Medicaid coverage, a person may not have more than $2,000 of countable assets.

2. Receipt of assets by an SSI or Medicaid beneficiary can cause a loss of those benefits.
A person who is receiving SSI or Medicaid benefits will lose those benefits if her countable assets increase above $2,000. This makes it especially important for parents who have a child with disabilities to create an estate plan which will not jeopardize their child’s access to benefits.

For example, if Mom has a $300,000 estate (home, bank accounts, etc.) and dies without a Will leaving three children, her estate will be divided equally among the children. If one of those children is disabled and receiving SSI, the receipt of $100,000 will cause him to lose his SSI and Medicaid benefits until the funds have been spent. If the child refuses to accept the inheritance, or if he gives the money to his siblings, he will be deemed to have made a disqualifying transfer and will be ineligible for public benefits until the disqualification period expires.

3. A parent can leave assets in trust for the benefit of a child who receives SSI and Medicaid.
If you are the parent of a child with disabilities, you do not have to disinherit your child to protect her SSI and Medicaid benefits. You can create a Special Needs Trust to receive that child’s share of your estate at your death. The terms of the Trust will direct the Trustee to use the income and assets in the Trust in ways that would supplement the benefits that are provided by the governmental programs. Examples of additional items that could be paid for with Trust monies include haircuts, salon services, massage and other alternate therapies, dental work, transportation expenses, cable television, internet, the expenses of purchasing and owning a pet, movies, concerts, etc.

The small stipend provided by SSI is not sufficient, and is not intended, to pay for expenses beyond the necessities of life. As a parent, you want to enrich your child’s life to the greatest extent possible. Funding a Special Needs Trust to support your child with these extras when you are no longer around to do so is an excellent way to ensure your child has the opportunity to live as full and robust a life as possible.

4. A Special Needs Trust funded with assets owned by the person with disabilities is a ‘self-settled’ Special Needs Trust.
A Special Needs Trust created by a parent for the benefit of a child, or created by anyone other than the disabled person, is sometimes called a Third Party Trust. A Trust created by someone who is receiving needs-based governmental benefits is a Self-Settled Trust. A Self-Settled Special Needs Trust is used when a person who is receiving needs-based governmental benefits receives assets that will cause her to lose those benefits. This can occur, for example, if the individual inherits assets directly or is awarded monies in a lawsuit.

For example, say Martin is hit by a car while he is crossing the street in the crosswalk, rendering him totally and permanently disabled and in need of 24-hour care. Martin successfully sues the driver for $1 million. While $1 million is a lot of money, it is not enough to pay for Martin’s care costs, which average $120,000 per year. If Martin has to spend his funds on his care, they will be depleted in less than 10 years. Martin can transfer his $1 million to a Self-Settled Special Needs Trust which meets the statutory requirements and thereafter he will be eligible for SSI and Medicaid. These programs will provide Martin with basic medical care and a small monthly stipend to pay for basics. The funds in the Trust will be used to provide Martin with those items not otherwise available to him such as massage therapy, dental work and movie tickets.

5. A self-settled Special Needs Trust must include a pay-back provision; a third party Special Needs Trust need not include a pay-back provision.
The major difference between a Third Party Special Needs Trust and a Self-Settled Special Needs Trust is that a Self-Settled Trust must include a pay-back provision. That means upon the death of the Trust beneficiary, the assets remaining in the Trust must first be used to reimburse the state for all benefits paid on behalf of the Medicaid recipient. Only after the state is satisfied in full can the assets remaining in the Trust be distributed to family members.

For people who have a family member receiving needs-based governmental benefits, doing advance planning by creating a Third Party Special Needs Trust means their disabled child or grandchild will be taken care of during the child’s lifetime. Advance planning will also ensure that funds remaining after the death of the beneficiary will be paid to family members rather than to the Commonwealth of Massachusetts.

Attorney Suzanne Sayward is a partner with the Dedham law firm Samuel, Sayward & Baler LLC and served as the 2009 president of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA). For more information, visit www.ssbllc.com.