A ”Supplemental Needs Trust” is a trust established and funded by a third party to provide for the supplemental needs of a disabled person while allowing the beneficiary to maintain eligibility for various “needs based” government programs.
Many disabled people can qualify for various programs like Supplemental Social Security and Medical Assistance, which exist in order to provide a basic level of societal support. However most of these support programs are “needs based,” meaning if you have too much income or too many assets, you cannot qualify for the programs.
The income and asset limitations used to create a problem for parents and other relatives of disabled children who wanted to pass money or assets to those children in their wills. If the disabled child received the gift, the child was disqualified from government benefits until the money or assets were spent down. Many felt that this was unfair, as a non-disabled child receiving the same gift would be free to use the gift to supplement their lifestyle.
As a result, both Minnesota and the federal government passed Supplemental Needs Trust statutes allowing a third party to establish a trust for a disabled person without causing the disabled person to lose benefit eligibility. The disabled person is then allowed to use the trust’s funds to provide for expenditures that the publicly funded programs would not pay.
Nearly anyone besides the disabled person or the disabled person’s spouse can create a Supplemental Needs Trust for a disabled person. This trust can be set up in a will (called a testamentary trust) or outside the will. In practice, it is generally preferred that the trust is created while the person funding it is alive because this provides greater flexibility in the trust, protection against potential changes in the law, and the ability for others to then place funds into the trust.
It is important to remember that a Supplemental Needs Trust may not be funded with money already legally owned by the disabled person, even if they have not yet received it. However, in such a case, there are slightly different options available (for example, a Special Needs Trust).
A Supplemental Needs Trust must be irrevocable and solely for the benefit of the disabled person. The money cannot be distributed directly to the disabled person. Distributions can only be made by the trustee purchasing items or services directly from a third party on behalf of the disabled person. The money in the trust may not be used to replace or duplicate money that a governmental program would otherwise provide. If the disabled person receives Supplemental Social Security, the money cannot be used for shelter or food. Use for clothing may also be problematic.
Establishing a Supplemental Needs Trust is relatively easy for an adult who has been certified as disabled. However, the same process can be more difficult for young children and others who have not yet received disability certification. In such a case, it is possible to obtain a review process through the state to get an equivalent certification or have two professionals who have examined the person certify that the person meets the social security disability standard.
If the beneficiary is 65 or older and has to go into a nursing home for an extended period, the trust will no longer protect the assets. Most Supplemental Needs Trusts contain provisions that terminate the trust at that point. On termination of the trust, the trust can provide where the remaining money or assets are distributed.
If you are interested in creating a Supplemental Needs Trust, or discussing your other financial planning options, please contact Tarrant & Liska.