Is there a connection between public benefits and personal resources (i.e., a person’s available assets and income)?

Many individuals with disabilities receive Supplemental Security Income (SSI), a monthly monetary allowance that usually makes the person eligible for Medicaid. Medicaid pays the cost of health services for people with disabilities. Adults are eligible for SSI if they have a disability that prevents them from working and earning a self-sufficient wage, and they do not have more than a certain amount of assets. Children who are minors are eligible for SSI if they have “marked and severe functional limitations” from a physical or mental condition. In order to remain eligible for SSI and Medicaid, a person cannot have more than $2,000 (Year 2000 figure) in cash or assets that can be converted to cash. These services are often referred to as “means-tested” because the person’s means (assets) are part of the eligibility criteria to qualify for services. Generally, people with disabilities who are eligible for SSI have the additional benefit of access to a variety of programs available to them, such as mentorship programs, caseworkers, therapy sessions, etc.

What services are not provided by public benefit programs?

Usually people who receive SSI have meager funds available that barely provide for basic living expenses. The person can only have a small amount of money (which may be as little as $30 a month), for a “personal care allowance” to pay for many services and items that public funds do not cover. Uncovered costs may include health insurance premiums, eye and dental care, entertainment, vacations, and other items and services that would enhance the individual’s quality of life. The personal care allowance is so small that families often use their own money to pay for extra items and services their child needs, even if their child is an adult.

How can I assure my loved one’s financial security and not jeopardize public benefits?

Too often, parents or others leave their loved one with a disability an inheritance. If your child receives SSI and/or Medicaid and has access to more than $2,000 in assets (e.g., from an inheritance), he would lose eligibility for SSI and Medicaid. He would have to spend down that amount to below $2,000 before he could reapply for these benefits. The disabled person would also lose the right to participate in the often-times invaluable programs he or she relies on. If he or she is receiving means-tested public services, the inheritance would be considered an asset and your child would incur “cost-of-care” charges. Publicly funded residential costs, for example, can amount to several thousand dollars per month. Having to pay even some of these costs can quickly deplete funds that were intended to supplement the low personal care allowance. In this situation, the inheritance or gift will not have the intended benefit if the result is loss of benefits.

Some parents do not leave an inheritance to their child. Instead, a sibling or other family member receives an additional share of the inheritance to use to benefit the person with a disability. This is sometimes referred to as a “morally obligated” gift or “informal trust.” Unfortunately, the assets intended to benefit the person with a disability may not be spent on this person. For example, if the non-disabled sibling divorces or dies early or has creditor problems, the extra funds may end up going to the divorced or widowed spouse, another heir or to creditors.

In addition, there are other drawbacks to this plan. The trustee must be knowledgeable about the benefits a person is receiving and how to report correctly on the distributions. The trustee has total power over all distributions and may hold back all or some of the trust’s distributions. Further, the additional inheritance values may serve to create an estate and inheritance tax problem for the child receiving funds which are in reality intended for another.

There are ways that you can help ensure financial security without risking SSI and related benefits. A good way of providing for the financial security of someone with a disability without jeopardizing government benefits is by using a Special Needs Trust (SNT). A Special Needs Trust can hold money or property that the grantor (the person who sets up the trust) leaves for the beneficiary’s benefit. Unlike an outright gift or inheritance through a will, a properly drawn up Special Needs Trust is not counted as an asset or income of the person with the disability and contains carefully written instructions on when and how to use the trust assets.

A family member or any other person can create a Special Needs Trust while still alive, as part of a will or trust agreement, or through the use of life insurance policies and proceeds.

How do I go about setting up a Trust?

There are usually two ways to create a legal trust. It can be testamentary (by last will and testament) or inter vivos (living).

Testamentary – This means the trust is part of a will and is not funded until after the person who drew up the will dies. The trust’s provisions can change any time the will is changed. So, if the intended beneficiary should die first, the will and trust can change. Taxwise, this kind of trust does not require the person to file or pay income tax on it since there are no funds in it until after that person dies.

Inter vivos (or Living) – This means a person sets up a trust before dying. In doing so, the parents

and/or others can make regular gifts to the trust or have the funding come after death, if preferred. Grandparents can make testamentary bequests from their will to a trust that is set up for their grandchild with a disability.

Living trusts are either revocable or irrevocable. You may modify the terms of a revocable trust during your lifetime. Those who establish an irrevocable trust must relinquish most power to modify or terminate the trust once it is created. Each method of establishing a trust has differing tax advantages and disadvantages (related to the size of your estate, your family situation, and many other factors). It is important to consult with an estate planning attorney about which kind of trust suits your particular financial and tax situation.

What is a “Third Party” Special Needs Trust?

A “Third Party Special Needs Trust” is a general term given to a Special Needs Trust that a parent or any other individual establishes for the benefit of a person with a disability. Third party trusts are based on applicable state law (both statutory and common law).

What can a Special Needs Trust pay for?

When a person with a disability is receiving SSI, a trust normally may not provide payments for food or shelter. Trusts are set up to provide services and items which do not jeopardize means-tested public benefits. Broad categories of expenditures include: health care needs not covered by Medicaid, education, recreation, and material needs which will provide comfort, security, and enjoyment for the beneficiary. To illustrate: disbursements may be made to the beneficiary or for his or her benefit to purchase eye glasses, hearing aids, a wheel chair, movie tickets, computer, vacation (even with a care provider, if necessary), and more. Funds may be accessed for the benefit of the beneficiary immediately after the trust is funded.

What happens to any remainder in the Trust if the beneficiary dies before it is used?

Trusts are frequently established with the goal of spending the entire principal and earnings by the time the beneficiary becomes deceased. However, the beneficiary may die prematurely and funds may remain after the becomes deceased. If the beneficiary has enjoyed Medicaid funding during his or her lifetime, then any state which has provided the beneficiary with medical assistance may make a claim against the remaining trust assets in an amount equal to the total value of the medical assistance paid by the state on behalf of the beneficiary. Once this amount has been paid (if any), then the remainder of the trust may be distributed as directed by the individual who created the Special Needs Trust.