Supplemental Needs Trusts (SNTs) are a way for individuals with disabilities to receive an inheritance or other assets while maintaining eligibility for essential government benefits. Understanding this option can significantly impact the financial well-being and quality of life for those with disabilities and their families.
Often, we work with families who want to leave their children or grandchildren with disabilities an inheritance but believe that there is no way to pass assets without a loss of eligibility for programs like Medicaid or Supplemental Security Income (SSI). They assume they must leave money to another family member and just hope that person does the right thing and uses the money for the benefit of the person with disabilities. This can create a mess of tax issues and open the funds to loss. The good news is there is a better way.
What is a Supplemental Needs Trust?
A Supplemental Needs Trust, also known as an SNT is a specialized legal arrangement designed to assist individuals with disabilities who require government benefits like Medicaid or Supplemental Security Income (SSI). These trusts are set up to hold and manage funds for the benefit of the individual without impacting their eligibility for assistance programs. This works because the assets in the trust are not owned by the person with disabilities, but belong to the trust itself and a trustee (who is not the person with disabilities) is only allowed to pay for things not already covered by the government benefits received.
Here is a quick cheat sheet to help you understand Supplemental Needs Trusts
- Preserving Government Benefits: One of the primary functions of an SNT is to safeguard an individual’s eligibility for essential government benefits like Medicaid or Supplemental Security Income (SSI). Without an SNT, inheriting assets, receiving insurance money, or accepting a financial court settlement could jeopardize these benefits, making it a valuable resource for many families.
- Protected Funds: Assets placed within an SNT are shielded from being considered as resources for determining eligibility for government benefits because they are owned by the trust, not the person with disabilities. This means that the individual can receive financial support from the trust while still qualifying for assistance programs.
- Management of Assets: The trustee, appointed to oversee the SNT, is responsible for allocating funds to support the beneficiary’s supplemental needs. These could include medical expenses, education, transportation, and other essentials not covered by government programs that contribute to a better quality of life.
What is the difference between a First Party and a Third-Party Supplemental Needs Trust?
There are multiple types of Supplemental Needs Trusts (SNT), but two of the most common are First Party and Third-Party trusts. The terms “First Party” and “Third Party” refer to where the money came from.
First Party trusts are created from money that already belonged to the disabled person. For example, if the disabled individual receives an insurance payout of a court settlement, they can put that money into a First Party SNT. This allows them to continue to qualify for benefits while they are alive, but after they die, any assets left in the trust will be used to pay back the government for the money it spent. There are rules to when a First Party trust may be set up, so it is important to check with your attorney to be sure this is an option that will work for you.
A Third Party SNT is created from assets that never belonged to the person with disabilities. A common example is a parent creating an estate plan that leaves money directly to the Third Party SNT for the benefit of their child with disabilities instead of directly to the child. Because the assets never belonged to the disabled person, and they are being managed by someone who does not benefit from the trust, the value of the trust does not factor into eligibility for government benefits. Also, after the beneficiary dies, any assets remaining in the trust may pass to another family member or charity because they are not used to pay back the government.
Management of Assets
A key feature of an SNT is how it manages funds for the individual’s benefit. The trustee is appointed to oversee the trust, and is responsible for disbursing funds for the beneficiary’s supplemental needs, such as medical expenses not covered by government programs, education, transportation, and more. This ensures that the funds are used to enhance the individual’s quality of life without jeopardizing their benefits.
For both a First Party and a Third Party SNT, the person who is benefitting may not be the trustee. In simple terms, this means someone else must be selected to manage and disperse the money and other assets in the trust. A family member, trusted friend, or commercial trustee may be selected to fill this role.
Supplemental Needs Trusts play an important role in estate planning for individuals with disabilities to secure inheritances, insurance payouts, or court settlements while safeguarding their eligibility for vital government benefits. These trusts offer a way to provide additional resources for enhancing the quality of life without disrupting crucial assistance programs.
If you or a loved one are considering setting up a Supplemental Needs Trust in Idaho, take a look at our general Estate Planning information, and then look at the Social Security information about Third party trusts or the Social Security information about First Party trusts and then give us a call so we can help you determine if a Supplemental Needs Trust is right for you or your loved one.