What Is a Supplemental Needs Trust?

Use these links to jump to different sections:

• Why a Special Needs Trust May Be Necessary
• Types of Trusts
• Selecting a Trustee

Trusts are a common estate planning tool that make it possible for individuals to provide for themselves or a loved one and still accomplish a specific goal or objective such as minimizing taxes or protecting a beneficiary. There are many kinds of estate planning trusts, each of which serve a particular function. One specific trust is a special needs trust (also called a supplemental needs trust), which is a specialized trust designed to provide for individuals with disabilities who also require public assistance, such as Medicaid. “Special needs trusts exist to supplement benefits a person with a disability may be receiving,” says Letha Sgritta McDowell, an attorney at Hook Law Center in Kitty Hawk. “Quite often, if they’re receiving benefits, additional resources are still needed. Public benefits are limited, and often the disability requires significantly more care than what can be provided. The trust helps improve quality of life, and expand services available to a person with a disability.”

Why a Special Needs Trust May Be Necessary

Medicaid, Supplemental Security Income (SSI) and similar government programs typically limit the amount of assets a recipient may have and still qualify for assistance. In North Carolina, for example, a single person who requires Medicaid can only have $2,000 in qualifying assets. A person with a disability (or a parent, grandparent, guardian or court) may establish a special needs trust using his or her own assets. The assets in the trust may then be used to supplement the SSI and Medicaid benefits the individual currently receives but the assets held within the trust are not counted towards the $2,000 asset limit. Frequently, these trusts are created when a beneficiary receives a large cash award such as from a personal injury or worker’s compensation claim. In addition to special needs trusts created for a person with a disability with his or her own funds, it is possible for other individuals to transfer assets to a person with a disability and still preserve their eligibility for public benefits.  This may be done using special needs trusts as well.  It is common for these trusts to be called third party special needs trusts (third party SNT).

Types of Trusts

There are some key legal differences between self-settled and third-party supplemental needs trusts. A self-settled trust may only be established without penalty for a beneficiary who is under the age of 65. A self-settled type of special needs trust must also contain a Medicaid payback provision that provides any trust funds remaining at the death of the beneficiary must first be used to pay the state Medicaid agency back for any services expended on the beneficiary during his or her lifetime. For this reason, it is often preferable to create a third-party trust for a beneficiary rather than transferring assets to the beneficiary and allowing them to create their own first party trust. So let’s say you have an elderly relative on Medicaid who presently has less than $2,000 in countable assets in his or her name.  If you wanted to leave that relative a sum of money under your will or through a conventional estate planning trust, you would jeopardize their Medicaid eligibility. But by placing your gift into a third party supplemental needs trust, you can help your relative pay for certain living expenses while preserving their ability to continue receiving public assistance. A trustee of a special needs trust, regardless of whether the trust is a first party SNT or a third-party SNT, has total discretion over when and how to make distributions from the trust. Such distributions should be used to provide goods and services the beneficiary cannot afford, and which are not covered by public assistance, such as:

• payments for contractors and tools to conduct home repairs
• health and life insurance
• entertainment expenses (e.g., books and movies)
• bus passes and other transportation expenses
• household goods and cleaning supplies
• any medical costs and medical equipment that are not already covered by Medicaid or another public assistance program
• educational expenses

A supplemental needs trust can also be used to pay for a beneficiary’s more basic living expenses—i.e., food, clothing and shelter—but it is important to note such distributions may reduce that person’s public benefits.

Selecting a Trustee

The role of a trustee in a special needs trust is critical since making the wrong type of distribution can have disastrous consequences for the beneficiary. Therefore, a trustee must be knowledgeable in the subject of trusts as well as have a good understanding of public benefits. “One question that is common is, ‘Who should be the trustee?’ There are corporate trustees that do an excellent job of administering the trusts. Certainly, friends and family members are able to act as trustees, but the disadvantage is that the distributions have to be very carefully made and considered. Often, friends and family members who don’t practice in the special needs world may mistakenly make distributions from the trust that cause long-term, significant problems for beneficiaries,” says McDowell. Special needs trusts can be extraordinarily beneficial for individuals with disabilities. If you have further questions about how a supplemental needs trust works, you should consult with a qualified North Carolina elder law attorney or estate planning attorney. For more information on this area, see our overview of elder law and trusts.