“Who are you planning for?” This was our question in “Planning for your future (Part 1) ” (April 2025 Boom Magazine). Part of that consideration is whether any of your beneficiaries are now or may be in the future receiving benefits from a needs-based public benefit such as Supplemental Security Income (SSI) or Medicaid. If so, a Supplemental Needs Trust may be an important tool to protect your beneficiary from losing and/or not obtaining a public benefit.
Supplemental Needs Trusts are an estate planning tool that may be utilized by an individual who has a qualifying disability. Its purpose is to improve the individual’s quality of life without impacting any public benefits he/she may be receiving or may need in the future. In a needs-based public benefit program, an individual whose resources exceed a certain limit may be disqualified from receiving benefits. This is where a Supplemental Needs Trust may be helpful. A Supplemental Needs Trust allows individuals to have access to funds for items not covered by their needs-based public benefit. The key is that these trusts supplement, not replace, any benefit provided by the needs-based public benefit.
THERE ARE TWO MAIN TYPES OF SUPPLEMENTAL NEEDS TRUSTS
1) First-Party Supplemental/Special (“Special”) Needs Trust: This trust is established by the Beneficiary/Grantor (“Beneficiary”). These terms are interchangeable for purposes of the First-Party Special Needs Trust (and/or by someone acting on the Beneficiary’s behalf) with the Beneficiary’s funds for the purpose of retaining or obtaining eligibility for needs-based public benefits. Another name for this trust is a “Self-Settled” Special Needs Trust.
Age Restrictions of Beneficiary: The trust is irrevocable, and the Beneficiary MUST be younger than 65. The individual must have a disability.
Compliance: Trust, SSI, and Medicaid rules
Who Initiates: Beneficiary, parent, grandparent, court, or conservator/guardian, NOT a spouse
Source of Funds: Beneficiary’s own money (example: the individual received money from a lawsuit, inherited the money directly, or won a lottery). The funds either belong to the individual or are controlled by the individual. It must be created and funded before the Beneficary’s 65th birthday. (The trust may continue after the 65th birthday, but the beneficiary cannot make new contributions to the trust with the exception of interest, dividends, or other earnings from the trust’s existing assets.)
Restricted Distributions: Appropriate distributions are made to the Beneficiary during his/her life, then at the individual’s death to Medicaid (“Medicaid payback provision”) up to the amount that Medicaid expended on the individual during his/her life (with some exceptions).
Beneficiary Control: The Beneficiary cannot be a Trustee and cannot have any control over the money.
Reporting Requirements: Social Security and Medicaid, and it must meet their criteria for eligibility of benefits and or continuation of benefits.
Medicaid Payback: YES. Additionally, if Medicaid were provided in more than one state, then the payback is prorated among the states that provided Medicaid.
2) Third-Party Supplemental Needs Trust: This trust is established by someone other than the Beneficiary with disabilities with assets that never belonged to the Beneficiary. Typically, it is funded by parents, grandparents, other family members, or perhaps close friends. The Beneficiary cannot be a Trustee and cannot have any control over the money.
Source of Funds: The funds for this trust may be derived from various sources, such as an inheritance in the name of the trust, third-party personal savings, third-party gifts, etc.
Age Requirements of Beneficiary: None
Medicaid Payback: No; once the initial Beneficiary dies, the funds in the trust may be disbursed to other named Beneficiaries in the trust.
Reporting Requirements: Social Security and Medicaid when it is funded.
What Expenses Supplemental Needs Trusts May Cover (Pay)
(These rules are subject to change.)
- Medical and dental expenses not covered elsewhere
- Equipment like wheelchairs or specially equipped vans
- A car
- Therapy or rehabilitation services
- Training and education
- Vacation
- Help with starting a business
- Home furnishings
- Travel, which can include the cost of a companion
- Transportation services (Uber, Lyft, bus pass, etc.)
- Recreation and entertainment (summer camp, movies, social events, sports equipment)
- Electronic equipment, appliances, and computers
- Payments for a companion
- Legal or guardianship expenses
- Insurance
- Burial expenses
What Expenses Supplemental Needs Trust May Not Cover (Pay)
- Rent or mortgage payments
- Cash
- Gift cards
- Condo association fees
- Property taxes
- Utilities, such as electricity, sewer
- Garbage removal
- Heating fuel
A Third-Party Supplemental Needs Trust may be a standalone trust or one embedded in a will. There are pros and cons to this decision as well. Another challenge in Supplemental Needs Trusts is the trustees. You must select people whom you trust 100% and who either understand the laws surrounding the trust and/or will seek help. There are also supplemental pooled trusts that may be considered, which will be discussed briefly in “Planning for your Future” (Part 5).
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