The Special Needs Trust and Qualifying for SSI and Medicaid

Today’s blog post continues the series about Special Needs Law.  The blog post on February 19, 2015 gave an overview of the legal issues facing people with special needs.  The blog post on February 5, 2015 discussed the new ABLE accounts.  The blog post on February 26, 2015 discussed sources of income for people with special needs.  The blog post on March 5, 2015 discussed medical insurance for people with special needs.  The blog post on March 12, 2015 discussed how the Social Security Administration requires people with special needs to prove a disability to qualify for Supplemental Security Income (SSI.)  The blog post on March 19, 2015 discussed how the Social Security Administration requires people with special needs to prove financial eligibility to qualify for Supplemental Security Income.  The blog post on March 26, 2015 gave an overview how someone with special needs can get rid of excess resources to become “poor enough” to qualify for SSI and Medicaid.

Today’s post discusses how a self-settled Special Needs Trust can help a person with special needs go from having too many assets to having few enough assets to qualify for (and maintain eligibility) for Supplemental Security Income (SSI) and, if necessary, for Medicaid.

Someone with excess resources can set up a Special Needs Trust according to the Chapter 42, Section 1396p(d)(4)(a) of the United States Code.  (The United States Code is the set of laws created by Congress, , the set of laws that “Bill” from School House Rock joins after he’s passed by Congress and signed by the President.)  Because of the subsection of the law that allows these trusts, they often are called d4a trusts.

These d4a trusts are self-settled.  That means that the person with special needs is putting his or her own money (or other assets) into the trust.  That is an important distinction with third-party trusts into which someone other than the person with special needs places assets.  (A future installment will discuss third-party trusts in more detail.)   To understand the importance of the first-party nature of d4a trusts, we should review how Social Security and Medicaid treat someone who has given away money to become financially eligible.

As we’ve discussed in prior installments, both the Supplement Security Income program (the Social Security program for people who are disabled but don’t have sufficient work history to qualify for Social Security Disability Income) and the Medicaid program (health insurance for poor people) are “means tested.”  Accordingly, people who have the financial means to pay for themselves are not eligible for SSI or Medicaid.  Because, for many people. there is a very high emotional cost (and sometimes a care cost) in allowing all of their life savings to be spent away, people look for a way to protect some of their assets while still qualifying for SSI and Medicaid.  Giving money (or other assets) to a relative, a trusted friend, or a trust helps protect the assets given away, but the gifts can make the applicant ineligible for SSI and Medicaid or trigger limited Medicaid coverage for a time.

That ineligibility for, or restrictions on, SSI and/or Medicaid would create a problem for many people with special needs.  They need the SSI income and the Medicaid health insurance right away.  At the same time, they want the ability to get some personal items or entertainment that they wouldn’t be able to afford if all they had were SSI income and Medicaid coverage, so they would like to find a way to “keep” some of their savings.

A d4a special needs trust can help fix the collision of the need for SSI and Medicaid and the desire to preserve some assets.  Someone who needs SSI and Medicaid but who has too much money to qualify can put the excess money into a d4a trust without getting a penalty of ineligibility or restricted coverage.  Then, the money is available, under certain restrictions, for the benefit of the person.

The contents of the trust can be used only for the benefit of the person who put the assets into it (while that person is alive.)  The trustee (the person who is the fiduciary in charge of the trust) can spend money from the trust for the benefit of the beneficiary (who MUST BE the special needs person who put the assets into it in the first place.)  The trustee cannot give the beneficiary cash (except for $20 per month spending money as discussed in an earlier installment ) without causing a reduction of the beneficiary’s SSI income.  Similarly, the trustee can’t spend money from the trust on food or shelter for the beneficiary without causing a reduction in SSI.

Perhaps the biggest restriction on the d4a trust is the requirement for a payback provision.  When the beneficiary (the person with special needs who put the assets into the trust in the first place) dies, the trust must repay Medicaid for the costs of care that Medicaid had previously paid for the beneficiary.  (If the contents of the trust are worth more, then the excess assets can be given out to remainder beneficiaries, like how a will operates.  If the Medicaid “debt” is equal to or greater than the contents of the trust, then the Medicaid gets it all.

So, if Medicaid is going to get it all anyway, why put anything into a d4a trust?  To get “extra” stuff while on SSI and Medicaid, that’s why.  SSI and Medicaid are necessary for some people with special needs, but they provide a bare minimum of income and health insurance.  They don’t provide entertainment or clothing or anything else above the bare minimum.  SSI and Medicaid don’t provide any “spice” to life.  They are safety net programs.  They aren’t supposed to provide “spice.”

A d4a special needs trust can provide some spice.  It can buy baseball tickets, a TV, a vacation, a magazine subscription, a computer and internet access to name just a few examples.  A special needs trust can provide just about anything (anything that is legal, anyway) for the beneficiary to allow the beneficiary to have something more than the bare minimum to survive.

If the beneficiary uses the entire contents of the trust, then Medicaid gets nothing.  That’s okay.

Unfortunately, the person with special needs can place assets in the trust only if he or she is younger than age 65.  So, this kind of trust isn’t available for seniors.

Also, a trust into which other people place money for the special needs person (a third-party or d4c trust) is often called a special needs trust, but I usually call them something different.  I will discuss these third-party trusts in a future installment.

A d4a trust allows someone with special needs (who has some assets) to continue to enjoy those assets during his or her lifetime and still get SSI and/or Medicaid.  It allows the beneficiary to avoid the empty feeling that can come from watching his or her life savings escape while trying to qualify for SSI and Medicaid.

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