There is an inherent challenge present when you would like to provide resources for a person with special needs. This can apply to your estate planning efforts, and it would also enter the picture if you want to give a large lifetime gift. This is because of the fact that a significant percentage of disabled individuals rely on need-based government benefit programs.
Medicaid is one of them. This is a jointly administered federal/state government health insurance program that is only available to people with very limited resources. Of course, people with special needs are going to require expensive medical treatments throughout their lives, so this coverage is absolutely essential.
Another government benefit that is available to some individuals with sparse resources is Supplemental Security Income. The name is more or less self-explanatory. This program provides a steady but limited stream of income for people that do not have any earning power.
Once eligibility has been granted, it is not necessarily permanent. If a person with a disability was to experience a significant change in financial status, benefit eligibility could be forfeited. The individual in question would have to exhaust the resources before eligibility could be reinstated.
Supplemental Needs Trusts
In a situation like this, you could provide for a loved one without jeopardizing government benefit eligible if you establish and fund a supplemental needs trust. This device is often referred to as a special needs trust. In the trust declaration, you name a trustee to administer the trust, and the person that you want to help would be the beneficiary.
If you are creating the trust while you are living to provide for a loved one, you can act as the trustee. Another family member or friend could be named as the successor trustee if there is a chance that you will predecease the beneficiary. You could go this route, but you would have the freedom to name anyone that is willing to assume the role as the trustee from the outset. Some people use a professional fiduciary like a trust company to administer supplemental needs trusts.
As we have stated, Supplemental Security Income is very limited. Plus, Medicaid does not cover every type of medical or rehabilitative service that the benefit recipient may want or need. Under the rules of the program, the trustee would be able to use assets in the trust to satisfy the supplemental needs of the beneficiary. This is why the device is called a supplemental needs trust.
There are a wide range of different goods and services that the trustee can provide for the beneficiary without violating any Medicaid rules. These would include vacations, transportation, home improvements, dental and medical care that is not covered by Medicaid, electronic equipment, tuition, and countless other things that would make the beneficiary more comfortable.
Medicaid would be required to seek reimbursement from the estate of the beneficiary after his or her passing. However, when a trust is funded by someone other than the beneficiary, the individual never owned the assets directly. As a result, they are not part of the estate of the deceased benefit recipient. Ownership of assets in the trust would be seen by successor beneficiary that is named in the trust declaration.
In some cases, a person with a disability will come into money. It can be a personal injury settlement or judgment or some other windfall. Under these circumstances, a parent, a grandparent, a legal guardian, or a court could use these assets to fund a special needs trust. The trustee would have the same ability to satisfy the supplemental needs of the beneficiary using trust resources throughout his or her life.
This type of supplemental needs trust is called a self-settled or first party trust. When a first party special needs trust has been established, the remaining assets in the trust would be in play after the death of the beneficiary during Medicaid estate recovery efforts.
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