I wanted to touch on a topic that has come up quite a lot recently, namely, how to leave property to individuals with disabilities. The key to this, in most cases, is to create a Supplemental Needs Trust (SNT) which will allow individuals with disabilities to retain inheritances or gifts without eliminating or reducing government benefits, like Medicaid or Supplemental Security Income (SSI). Using the SNT allows them to receive additional funds to pay for things not covered by their benefits.
Having an experienced estate planning attorney properly create the SNT is critical to preserving the individual’s benefits, according to a recent article titled “Protecting Government Benefits using Supplemental Needs Trusts” from Mondaq.
Individuals who receive SSI must be careful, since the rules about assets from SSI are far more restrictive then if the person only received Medicaid or Social Security Disability and Medicaid.
The trustee of an SNT makes distributions to third parties like personal care items, transportation (including buying a car), entertainment, technology purchases, payment of rent and medical or therapeutic equipment. Payment of rent or even ownership of a home may be paid for by the trustee.
The SNT may not make cash distributions to the beneficiary. Payment for any items or services must be made directly to the service provider, retailers, or other entity, for benefit of the individual. Not following this rule could lead to the loss of benefits as giving the money to the beneficiary counts against their benefit’s asset limit.
Now, some families who already have a loved one utilize government benefits might be familiar with SNTs generally. If that’s the case, there is a second aspect of SNTs to be familiar with which is whether the SNT is funded with the individuals’ assets or other people’s assets.
If the SNT is funded using the person’s own funds, it is called a “First-Party SNT” This is a useful tool if the disabled person inherits money, receives a court settlement or owned assets before becoming disabled.
If someone other than the person with disabilities funds the SNT, it’s known as a “Third-Party SNT.” These are most commonly created as part of an estate plan to protect a family member and ensure they have supplementary funds as needed and to preserve assets for other family members when the disabled individual dies.
The most important distinction between a First-Party SNT and a Third-Party SNT is a First-Party SNT must contain a provision to direct the trust to pay back the state’s Medicaid agency for any assistance provided. This is known as a “Payback Provision.”
The Third-Party SNT is not required to contain this provision and any assets remaining in the trust at the time of the beneficiary’s death may be passed on to residual beneficiaries.
Many estate planning attorneys (ourselves included) us a “standby” SNT as part of their planning, so their loved ones may be protected, in case an unexpected event occurs and a family member requires benefits.
References: Mondaq (May 27, 2022) “Protecting Government Benefits using Supplemental Needs Trusts”