Supplemental Needs Trusts Offer Planning Options for the Disabled

By Lamson, Carole C. | The CPA Journal, August 1998 | Go to article overview

Supplemental Needs Trusts Offer Planning Options for the Disabled


Lamson, Carole C., The CPA Journal


THE PRIMARY PURPOSE OF THE SUPPLEMENTAL NEEDS TRUST IS to pay the disabled person's bills without jeopardizing that individual's eligibility for public benefits.

Supplemental needs trusts are useful planning tools for qualified disabled individuals. One type of supplemental needs trust is for disabled individuals under 65 years of age who have assets, including real estate, in excess of the amounts allowed by Medicaid and Supplemental Security Income (SSI). This trust, sometimes called a "first-party" supplemental needs trust, is an agreement under which a disabled individual transfers his or her own property, including cash, stocks and bonds, an apartment, or a house with the intent that it will be administered for his or her sole benefit by a trustee of his or her choice.

A parent, other relative, or friend may also create and fund a supplemental needs trust, sometimes called a "third-patty" supplemental needs trust, for the benefit of a disabled individual of any age with any type of assets.

The primary purpose of the supplemental needs trust is for the trustee, as manager of the trust, to use the trust's assets to pay the disabled person's bills, including those for rent, food, clothing, shelter, medical care, or entertainment without jeopardizing that individual's eligibility for the public benefits upon which he or she depends.

Under the trust terms, while the disabled individual is on entitlement programs, no money from the trust should be paid directly to him or her. If money were paid to the individual, eligibility for the programs would be jeopardized. Instead, the income and principal of the trust may be paid directly to the providers of goods and services for the disabled person.

Generally, if the individual is no longer disabled or no longer dependent upon government entitlements, the trustee may pay out the assets of the trust directly to the individual.

Trusts Protect Assets and Eligibility for Medicaid

In the past, the financial resources of disabled individuals may have rendered them ineligible for valuable public benefits including Medicaid and SSI. Such financial resources include savings accounts, stocks and bonds, real estate, royalties, personal injury awards, annuities, and disability contracts. It was not possible to protect these assets with any certitude by transferring them to a trust. Also, if disabled persons received gifts or inheritance, they were frequently disqualified for benefits.

Presently, state and Federal legislation provide a framework for the use of trusts to shelter funds for the future of disabled persons. The purpose of the legislation is to encourage planning by providing assurance that supplemental needs trusts established for or by persons with disabilities who are receiving, or will receive, government benefits will be used to enhance the quality of their lives.

The supplemental needs trust, also called a special needs trust or a luxury trust, provides complete discretion to the trustee to make in-kind distributions of both principal and income to the beneficiary but limits such distributions to needs supplemental to those provided by such programs as Medicaid. In-kind distributions are payments made by the trustee directly to a provider of goods and services on behalf of the disabled individual. Supplemental needs may include food, clothing, shelter, transportation, medical, psychiatric and health care, vacations, recreational or educational programs, and equipment, perhaps even a house equipped to accommodate a disabled person. Such supplemental needs trusts are not intended to supplant, impair, or diminish any benefits or assistance of any Federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or from which the beneficiary may be receiving benefits.

First-Party Trusts for the Disabled Under Federal Law

A supplemental needs trust is a firstparty trust when it is funded with the assets of the disabled individual who is also the beneficiary of the trust. …

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