1. Third-Party Trust Created For A Public Benefits Recipient
A special needs trust may be created by a grantor who would like to set aside or bequeath assets to another individual without jeopardizing the individual’s eligibility for public benefits. The grantor’s goal is not solely to establish public benefits eligibility for the grantor. This situation occurs most frequently where a parent seeks to establish a trust for the benefit of a disabled child. The situation may also arise where the spouse of a Medicaid recipient, or potential Medicaid recipient, desires to leave some or all of the couple’s estate in trust for the benefit of the Medicaid recipient spouse.
Example: Mr. Jones is in a nursing home and is a recipient of Medicaid benefits. His wife, Mrs. Jones, is in the community. All of the couple’s assets have been transferred to Mrs. Jones. She executes a will in which those assets are transferred to the trustee of a special needs trust for the benefit of Mr. Jones.
2. Third-Party Trust Created for Another Where the Grantor Seeks Public Benefits
A special needs trust may be established by a grantor who desires to set aside assets in a trust for a disabled child or disabled individual under age 65 where at least part of the grantor’s motive is to attain Medicaid eligibility for the grantor. Such transfers to a trust do not disqualify the grantor from Medicaid eligibility under the exceptions provisions in the statutes.
Example: Mrs. Jones is in a nursing home and desires to apply for Medicaid but has excess resources. Her 47 year-old disabled daughter Jane is a recipient of SSI and Medicaid benefits. Mrs. Jones establishes a special needs trust for the benefit of Jane and transfers her excess resources to the trustee of the trust. The transfer does not disqualify Mrs. Jones from Medicaid; in fact, she is now immediately eligible for benefits. The resources in the special needs trust do not disqualify Jane from receiving SSI and Medicaid.
3. Self-Settled Trust for Public Benefits Recipient
A special needs trust may also be established for a disabled individual who seeks to set aside his own assets for his own benefit in a self-settled trust. Most self-settled special needs trusts are established to protect the proceeds of a personal injury settlement or inheritance. Creating and administering this type of trust is challenging due to the correlation between state and federal trust requirements and often inconsistent and unclear rules of public benefits programs. Practitioners must have thorough understanding of the rules of each program for which the trust beneficiary may wish to qualify in order to draft a special needs trust that will not jeopardize the public benefits eligibility of the trust beneficiary.
Example: Jane Jones is a 39 year-old unmarried SSI recipient. She has cerebral palsy and has high medical expenses that are paid for by the State Medicaid program. Recently, her great aunt died and left her a $300,000 inheritance. As a result, she no longer meets the strict resources eligibility criteria of the SSI program. Under statute, her mother establishes a special needs trust for her, and Jane transfers the inherited funds to the trustee of the trust. She retains her eligibility for federal SSI and State Medicaid benefits.