Special Needs Trust: Protecting an Inheritance without Losing Government Benefits

Many government benefits including Medicaid and Supplemental Security Income (SSI) are means-tested. In other words, eligibility for these benefit programs is restricted on the basis of both assets and income.  In addition to other requirements, a person may not have more than $2,000 in countable assets and a couple may not have more than $3,000 in countable assets in order to qualify for benefits.

If you are expecting an inheritance or if you plan to leave money to someone who is receiving government benefits, the inheritance could cause significant problems without proper planning. If the money or property is simply gifted, it would increase the assets above the $2,000 or $3,000 eligibility threshold, therefore eligibility for SSI, Medicaid, and other means-tested programs can be lost.  The loss of benefits can be devastating to the recipient.

Using a special needs trust is a planning technique that allows a person to receive an inheritance without it being considered a countable asset for the purposes of determining eligibility for Medicaid and other means-tested benefits. You, or the person to whom you are leaving money or property, will not be considered the owner of the property or other assets. Instead, the trust will own the assets and the trustee will manage the money on behalf of the benefit recipient.

If you wish to leave assets at your death to a person with disabilities or a spouse who receives Medicaid benefits, you should consider setting up a third party special needs trust (SNT). The assets could remain in your name as long as you live but at your death, the assets would be transferred into the special needs trust, for the benefit of the person with disabilities. Assets in a properly set up third party special needs trust are not countable assets under the rules of SSI or Medicaid. The beneficiary maintains eligibility for the government program(s) and also receives the benefit of the trust assets.  The trust document states who is to receive any remaining trust assets after the beneficiary’s death. The State (i.e. through the government benefit program) does not receive any of the trust money.

If a person who is on Medicaid or other means-tested benefits inherits assets outright, in their personal name, that were not left to a special needs trust, it may be possible for such person to set up a first party special needs trust and transfer the assets to the trust.  Once established and funded, a first party SNT protects assets for the benefit of the person with disabilities in the same way as a third party SNT.  However, there is a very important difference between and a first party and a third party SNT. In a first party SNT at the death of the beneficiary,  the State has the right to be reimbursed from any remaining trust assets for the benefits expended on the beneficiary  during his/her lifetime. In a third party SNT, the State does not have any right to reimbursement.

The estate planning lawyers at the Elder Law Firm of Clements & Wallace, P.L. are experienced in preparing special needs trusts that protect an inheritance without disqualifying the beneficiary for government benefits. We can provide you with the legal advice and guidance that you need.