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Understanding supplemental needs trusts

January 18, 2011 | 03:29 PM
A supplemental needs trust is an irrevocable trust designed to provide benefits to, and protect the assets of, physically disabled or mentally disabled persons and still allow such persons to be qualified for and receive governmental health care benefits, such as long-term nursing or home care benefits and Supplemental Security Income.

Essentially, there are three types of supplemental needs trust, (1) First Party Supplemental Needs Trust; (2) Third Party Supplemental Needs Trust and (3) Pooled Income Trust.

First party supplemental needs trust

A first party supplemental needs trust is funded with assets of the disabled individual who is under the age of 65, and may only be created by a parent, grandparent or legal guardian of the disabled person. The court also has the power to create a first party supplemental needs trust for a disabled individual.

Oftentimes these trusts are used where an individual suffers a disability as a result of an accident or medical malpractice and consequently receives an award as a result of a lawsuit. Additionally, where an individual has his own money at the time of the onset of a disability or where he receives an inheritance, a first party supplemental needs trust is an appropriate planning tool.

Monies deposited into these trusts can be used to enhance the quality of life of the disabled individual by covering the cost of any expense which would not otherwise be covered by Medicaid. For example, the funds in an SNT can be used to purchase clothing or a television set. However, direct cash payments to the disabled individual are not permitted. Such payments may render the Medicaid recipient ineligible for his benefits. Therefore, it is important to be mindful of how disbursements are made from these trusts.

It is also important to note that a properly drafted, valid first party SNT must include what is commonly known as a "payback" provision. This provision dictates that any monies that remain in the trust at the time of the disabled individual's death must be paid to the state in an amount equal to the medical assistance paid on behalf of the individual. Should there be any monies left over after the payback those monies will be paid to the remainder beneficiaries in accordance with the terms of the trust.

Third party supplemental needs trust

Oftentimes, our clients come to our office with the mistaken belief that the only way to ensure that their disabled child will continue to receive benefits at the time of the parents' death is to disinherit them. Fearful that an inheritance will place their disabled child above the threshold asset and income level, these families believe that they have no choice but to disinherit that child. This is simply not the case. A third party supplemental needs trust created for the benefit of a disabled individual not only provides the family a way to include their disabled child in their estate plan but can also provide the disabled individual with an enhanced quality of life.

The assets in the trust can be used to provide the disabled individual with comforts they would otherwise not be able to afford. Because these trusts are set up with the funds of a third party, unlike the first party supplemental needs trust they do not have a payback provision. Upon the death of the original beneficiary of the trust, whatever assets remain in the trust can be distributed in accordance with the grantor's wishes.

Pooled income trust

Finally, a pooled income trust is a trust which is used by disabled persons who are receiving Medicaid services at home as a way to preserve their income which is in excess of the allowable amount under state Medicaid rules.

This trust permits an applicant to deposit their excess income (everything in excess of $787 in 2010) into a trust fund which is referred to as a "pooled trust." These pooled trusts are created by not-for-profit agencies and are a terrific way for persons to take advantage of the many services available through Medicaid home care while still preserving their income for use in meeting their monthly expenses.

Functionally, the way that these trusts work is that the applicant sends a check to the fund monthly for that amount which exceeds the allowable limit. Together with the check the applicant submits household bills equal to the amount sent to the trust fund. The trust deducts a small monthly fee for servicing these payments and then, on behalf of the applicant, pays those household bills. As you can see, this process allows the applicant to continue relying on his monthly income to pay his bills, and at the same time, reduce his income amount to that amount which is permitted under the Medicaid rules.

It is important to keep in mind that while a first party supplemental needs trust may only be created for a disabled individual under the age of 65, both the third party supplemental needs trust and the pooled income trust may be created for a person of any age who has a disability.

In our practice we have used the third party supplemental needs trust to protect inheritance for persons of all ages and with many differing disabilities. The use of the pooled income trust has enabled many of our clients to age in place and receive quality medical care through the state Medicaid program while still preserving their income.

For illustrative purposes, a client who comes to us and is otherwise eligible for Medicaid services but for a high income of close to $3,000 as a result of receiving social security income and a state pension, is able to preserve virtually all of that income through the use of the pooled income trust and remain at home receiving services and most importantly, does not face the choice of giving up that income or receiving the services that he needs.

In sum, supplemental needs trusts are invaluable planning tools for those who have a loved one with a disability. The ability to create and fund a supplemental needs trust for a loved one who is receiving government benefits ensures an enhanced quality of life for disabled individuals who are fortunate enough to be beneficiaries of such trusts.

Nancy Burner, Esq. has practiced elder law and estate planning for 15 years. The opinions of columnists are their own. They do not speak for the paper.

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