Special Needs Trust - in Detail

Many government programs that provide income or payment for medical services and assistance to individuals with disabling conditions have strict financial eligibility limits. Without careful planning, assets received by a child or adult who is enrolled in or eligible for these benefit programs—such as Supplemental Security Income or state medical assistance—can jeopardize eligibility for those programs.

A Special Needs Trust (or Medicaid Payback Trust) is a trust arrangement that allows an individual with disabilities to have funds available for his or her needs without the funds counting as a financial asset for benefit eligibility purposes.

Typically, Special Needs Trusts are funded by assets the injured person received from a personal injury settlement, jury award, or an inheritance. The beneficiary of an SNT must

• be under 65 when the trust is established, and
• meet the definition of disability under the Social Security Act – Title II.

In addition, the trust must include a Medicaid reimbursement provision.

The trust must be established by a parent, grandparent, legal guardian, or a court. That simply means that a parent, grandparent, or legal guardian must sign the trust agreement, or it must be ordered by the court. There is no requirement that the person establishing the trust contribute funds into the trust.

There are also guidelines for using the trust funds. For example, it is generally best to use trust funds to purchase "supplemental" goods and services, not food, shelter, or clothing or items that can be obtained through government programs.

A pooled trust is a Special Needs Trust that may be advisable when a smaller amount of assets is involved, and when it is in the best interests of the individual for a professional to make decisions about investments and distributions (payments out of the trust).

An individual with a disability can establish a pooled trust account on his or her own behalf. Therefore it may be appropriate when he or she has assets to place in the trust but does not have a parent or grandparent available to enter into a trust agreement. Pooled trusts must be established and managed by a nonprofit organization. They are available in many states.

A Special Needs Trust can be established even after an individual has received funds directly and thus has exceeded program eligibility limits. Transferring funds to a Special Needs Trust—including some pooled trusts run by nonprofit organizations—is permissible under federal law. It is one of very few ways an individual can legitimately transfer assets in order to re-establish benefit eligibility.