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How to Use Special Needs Trusts

Posted by Chad Seiter | Apr 11, 2022 | 0 Comments

If you have a family member with a disability, you have probably wondered how to protect their financial assets while also helping them remain eligible for important benefit programs such as Medicaid and Supplemental Social Security Income (SSI).

In many situations, your loved one may face a conundrum of sorts – they have access to funds such as an inheritance or legal settlement, but will still need SSI and Medicaid at some point, if not already. Qualifying for “means-tested” programs such as Medicaid and SSI can be a complex process involving very low-income thresholds and other factors. This can be especially tricky when someone receives a cash gift, inheritance, or other financial windfall that is not “earned,” but is nevertheless considered income for Medicaid or SSI review purposes.

What Special Needs Trusts Can Do

Special Needs Trusts (or “SNTs”) can be incredibly useful as a planning tool in these situations. The Special Needs Trust is a legal arrangement in which a disabled person's assets are managed by a trustee – typically a parent or close family member. The trust's assets can be utilized to help cover the beneficiary's expenses that go beyond day-to-day costs covered by SSI, or medical costs covered by Medicaid. Crucially, Special Needs Trusts are recognized by the federal government as potential exemptions when calculating an individual's financial resources. Kentucky's statutes (Ky. Rev. Stat. § 387.865) also set out specific guidelines as to who may create a Special Needs Trust in Kentucky.

Special Needs Trusts can be used to help a beneficiary pay for matters such as:

  • Personal care such as haircuts, etc.
  • Transportation and rideshare programs
  • Entertainment and hobbies
  • Educational courses and job training
  • Housekeeping and cooking assistance
  • Certain medical services, treatments, and equipment not otherwise covered by Medicaid.

To avoid jeopardizing the beneficiary's government benefits, it is crucial NOT to let trust funds cross over and be used to pay for basic necessities (food, rent, etc.) that SSI is intended to cover.

Three Main Types of Special Needs Trusts in Kentucky

There are three common types of Special Needs Trusts that Kentuckians rely upon:

  • First-Party Trusts. These are funded by the disabled person themselves (or with the assistance of a relative), and the funds come from the individual's own resources. This could be money from a settlement, inheritance, or some other source that could create problems in qualifying for SSI and Medicaid. This type of fund must be created before the individual turns 65, but can continue after they turn 65 if that deadline was met. Any funds left over after a qualified individual's death can generally be claimed by the government to pay back Medicaid before being distributed to heirs.
  • Third-Party Trusts. These are funded by family members or other third parties that seek to provide for the beneficiary's uncovered living expenses, without disrupting their SSI or Medicaid coverage. Under Third-Party Trusts, family members can contribute additional funds or cash gifts to the trust as they see fit. This also provides a mechanism for inherited funds to pass to the beneficiary without costing them their government benefits. One other benefit is that upon the beneficiary's death, there is no requirement to turn over the trust's funds to Medicaid, as these funds never belonged to the beneficiary.
  • Pooled Trusts. As the name suggests, a pooled trust collects funds from a number of different beneficiaries and pools them into a larger investment fund. Each beneficiary has their own account, and receives funds in proportion to their share of the pool. In this scenario, a non-profit organization serves as the trustee and handles investment decisions and tax issues, relieving the family of certain financial responsibilities. As with First-Party Trusts, leftover money at the beneficiary's death goes toward Medicaid reimbursement.

What to Do When Considering a Special Needs Trust for Yourself or a Family Member

Determining which type of Special Needs Trust may be right for you, or a family member, depends on a number of circumstances as well as your own wishes. These trusts can be complicated, and going about things the wrong way can have serious ramifications – including Medicaid disqualification – down the road. You will want to discuss all available options with a skilled legal professional that will put you in the best position going forward. Our elder law and Medicaid planning attorneys at Darpel Elder Law are thoroughly familiar with all issues in this area, and can help you set up the optimal Special Needs Trust to protect yourself or a relative.

Contact Darpel Elder Law for a Consultation Regarding Special Needs Trusts Today

If you are ready to put assets into a Special Needs Trust, or are simply curious about your options, we can help. The attorneys at Darpel Elder Law know the unique issues involved with Special Needs Trusts and how they can balance with SSI and Medicaid coverage. Contact Darpel Elder Law today to discuss your full range of options with an experienced attorney. Call our office at (859) 341-4100, or visit our website at www.darpelelderlaw.com.

About the Author

Chad Seiter

Attorney at Law

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