Supplemental Needs Trusts

Many individuals provide for family members who are disabled and rely on government benefits. However, when an inheritance is given to an individual reliant on government benefits through a traditional trust plan, in some cases, the inheritance may disqualify him or her from receiving government benefits. In other words, good intentions can cause more harm than good. One solution is creating a supplemental needs trust, sometimes referred to as a special needs trust. Proper planning is vital for anyone with a family member with a disability, particularly if that individual relies on government benefits, such as Medicaid for long-term care.

How a Special Needs Trust Works

A trustmaker can establish a supplemental needs trust as part of their overall trust plan. It is a separate trust provision within the main trust. The disabled beneficiary's share can be assigned to a supplemental needs trust, effectively moving the ownership of that income out of the beneficiary’s name. This keeps that income from being counted as additional assets owned by the disabled beneficiary. Such assets may disqualify him or her from receiving income-based government benefits.

In short, the supplemental needs trust retains the disabled beneficiary’s inheritance on his or her behalf, avoiding disqualification from government benefits. It is a way of ensuring a legacy rather than causing a legal and financial mess.

How to Apply a Supplemental Need Trust

A trustee is appointed to oversee the supplemental needs trust and to ensure that the trust’s provisions are adhered to and that services or special needs are paid directly to the entity or individual providing them. The trustee also ensures that trust funds will not be distributed if the funds could disqualify the beneficiary from their government. For example, if a parent were to leave $250,000 outright to a child who is disabled and relies on Medicaid benefits, that money may disqualify him or her to receive benefits because he or she no longer meets the financial eligibility requirements. Instead, the parent should assign those funds to the supplemental needs trust. Then, the appointed trustee oversees the distribution of those funds to provide for the needs of the individual and in accordance with the provisions of the supplemental needs trust. 

The Best Method for Utilizing a Supplemental Needs Trust

A contingent supplemental needs trust should be considered in every trust plan, regardless of whether or not the trustmaker has disabled beneficiaries. Doing so allows one to plan for the inevitable. What if the trustmaker creates the trust, and several years later one of his or her children, a trust beneficiary, becomes disabled and is reliant on government benefits? The trustmaker could clearly state that the distribution of the trust share of any beneficiary who becomes reliant on government benefits will be distributed according to the supplemental needs trust. By having a stand-by supplemental needs trust, the disabled child’s share would automatically default to the supplemental needs trust provisions. Thorough planning will ensure your family’s legacy and your own peace of mind.

By Rustin Diehl