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What is a Special Needs Trust?

by David Cutner, Elder Law Expert
February 12, 2015

Question: What is a special needs trust?

Answer: This type of trust – correctly referred to as a “supplemental needs trust” – is designed to hold and protect assets for the benefit of a disabled person, without jeopardizing his or her eligibility for government benefits such as Medicaid.  The idea is to supplement, not replace, benefits afforded by these programs.  In addition, the supplemental needs trust is designed to protect the assets in the trust from being considered when eligibility for benefits is determined, and to protect against the claims of future creditors, including in some instances the government agencies that may have provided benefits.

There are actually a few different kinds of supplemental needs trusts, the basic distinction being whether the assets in the trust were provided by the beneficiary of the trust, or by someone else.

When the trust is established with the funds of the beneficiary, it is called a First Party Supplemental Needs Trust.  The need for this type of trust typically arises when a person who is receiving government benefits under a means tested program such as Medicaid receives funds from (1) an inheritance or gift, or (2) a judgment or settlement in a lawsuit (usually that followed an accident or injury that caused the person’s disability).  This type of trust can only be created by a parent, grandparent, guardian, or court – but not by the beneficiary of the trust.  A First Party trust is a “payback” trust, meaning that, if any assets remain in the trust when the beneficiary dies, Medicaid has the right to be reimbursed for the cost of the services that it provided to the beneficiary.  If Medicaid’s claim is satisfied, any assets that remain can be distributed to family members or other contingent beneficiaries.

If the funds in the trust are provided by someone other than the beneficiary, then it is a Third Party Supplemental Needs Trust.  This type of trust can be created by anyone, friend or relative.  The trust can be funded during the grantor’s lifetime, or through his Will or other trust.  There is no “payback” requirement.  Note that a Third Party Supplemental Needs Trust for the benefit of a spouse can only be a testamentary trust, which becomes effective upon the grantor’s death.

Direct gifts or bequests to a disabled person should be avoided, since the same funds can be made available through a Third Party Supplemental Needs Trust without jeopardizing the person’s benefits from Medicaid or other programs.

If you know anyone who suffers from a disability, a supplemental needs trust will likely be a valuable legal tool that should be considered.  

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David Cutner is one of the founders of Lamson & Cutner, P.C., a preeminent Elder Law firm in New York City and Westchester County. Mr. Cutner is known as an experienced and compassionate advocate for the elderly and disabled. Personal attention to the financial and health care needs of each client, and accurate, individualized advice, are hallmarks of the firm. Mr. Cutner helps clients achieve their goals in a cost-effective way.

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