Supplemental Needs Trusts can help people with disabilities preserve their financial security without risking their government benefits. Ahead, we explore how different types of trusts work and how they impact Medicaid and SSI eligibility.
A Supplemental Needs Trust (SNT) helps protect the finances of people with disabilities without jeopardizing their eligibility for government benefits like Medicaid and Supplemental Security Income (SSI). An SNT can hold money and property that can be used to improve the person's quality of life without making them ineligible for these government programs.
The funds in an SNT can help with things like medical care, education, housing, and personal services that Medicaid or SSI typically do not cover. Generally, both Medicaid and SSI have strict financial eligibility requirements that generally restrict an individual's assets to $2,000 or less, but by putting assets into a trust, individuals or their families can manage these additional funds in a way that won't count against the existing asset limits.
Revocable and irrevocable trusts impact Medicaid eligibility in very different ways.
A revocable trust (or living trust) allows the person who creates it to change, modify, or revoke it at any time during their lifetime. Revocable trusts do not protect assets for Medicaid purposes.
An irrevocable trust cannot be changed or revoked once it is established. An irrevocable trust is generally not counted toward Medicaid's asset limit as long as the trust is set up correctly and meets Medicaid requirements.
An SNT is usually irrevocable. Since the beneficiary does not directly control the assets, they do not count toward the asset limits set by Medicaid or Supplemental Security Income (SSI), allowing them to maintain eligibility for government benefits like Medicaid and SSI.
Each type of trust is tailored to specific needs while sticking to government rules that protect program eligibility. These include the Sole Benefit Rule, Third-Party SNTs, Self-Settled SNTs, and Pooled Trusts.
The Sole Benefit Rule applies to trusts meant to help a single person with disabilities. This money and property in the trust can only be used for that person's benefit, and the funds cannot be redirected to other individuals. The Sole Benefit Rule applies to trusts that the person sets up for themselves, as well as trusts set up by someone else for the person. These trusts must clearly show that the money and property are only for the person's use.
A Third-Party SNT is set up by someone other than the trust beneficiary, usually a family member, to support a person with disabilities. Since the beneficiary doesn't legally own the assets, they don't count towards Medicaid or SSI asset limits. After the beneficiary's passing, any remaining funds in a third-party SNT can be given to other family members or heirs, as there is no Medicaid payback requirement.
A Self-Settled SNT, also known as a First-Party SNT is funded using the assets of the person with disabilities. This trust is often set up when the person with disabilities receives a large settlement, inheritance, or personal assets that could otherwise make them ineligible for Medicaid or SSI. Self-settled trusts have a Medicaid payback provision, meaning that any remaining funds after the trust beneficiary's death must be used to reimburse the state for Medicaid benefits received while living.
Pooled Trusts are managed by nonprofit organizations, combining the assets of several people with disabilities into a single investment fund. Still, each trust beneficiary has their own account within the trust. Pooled Trusts may be an option for those who don't have enough assets to set up a separate SNT. Like self-settled trusts, they are subject to a Medicaid payback provision, meaning that after the beneficiary's death, any remaining funds may be used to reimburse Medicaid for benefits paid. However, the nonprofit often keeps any excess funds to support other beneficiaries or charitable causes.
To protect the beneficiary's access to Medicaid and SSI, careful planning is required to set up a Supplemental Needs Trust (SNT).
Medicaid has a five-year look-back period (or three years in some cases) that applies when someone applies for long-term care benefits. Medicaid reviews financial transactions, including asset transfers, made during the five years before the Medicaid application. If Medicaid finds that an individual transferred assets for less than fair market value (e.g., gifts or transfers into certain types of trusts), it may impose a transfer penalty, delaying their eligibility for Medicaid long-term care benefits.
Transfers into third-party SNTs, which are created and funded by someone other than the beneficiary (e.g., a parent or grandparent), are not subject to the look-back period because the assets belong to the third party, not the Medicaid applicant.
Self-Settled (First-Party) SNTs are funded with the beneficiary's own assets. While self-settled SNTs help protect eligibility for Medicaid, they are generally exempt from the look-back period for individuals under 65. If the trust is established correctly, it allows individuals with disabilities under 65 to transfer their assets into the trust without triggering Medicaid's transfer penalty. The trust must include a Medicaid payback provision, which requires any remaining assets to reimburse Medicaid after the beneficiary's death. This allows the beneficiary to preserve their assets while maintaining eligibility for Medicaid benefits.
Note: If an individual over 65 tries to transfer assets into a self-settled SNT, the transfer will likely be treated as a disqualifying transfer and subject to Medicaid's transfer penalty rules. Therefore, this type of trust is best suited for individuals under 65 who are receiving or planning to apply for Medicaid benefits.
Assets that can be placed in an SNT depend on the kind of trust. They might include cash, real estate, stocks, bonds, and personal property. For third-party SNTs, assets may be gifted by family or friends. In self-settled SNTs, assets owned by the trust beneficiary, such as an inheritance or legal settlement, are generally used.
The beneficiary of an SNT must be an individual with a disability who qualifies for public benefits like Medicaid or SSI. The trust is specifically designed to support individuals with disabilities without disqualifying them from these programs.
When the person who receives support from the trust passes away, what happens to any leftover money depends on the type of trust. Any remaining money can be given to other family members or heirs in a third-party trust because paying back Medicaid is not required. However, in a self-settled or pooled trust, any extra money must be used to pay back Medicaid for the benefits the person received during their life before giving money to anyone else.
ABLE accounts are a type of savings account for people with disabilities. The money in an ABLE account can be used for certain expenses like healthcare, housing, and education. It doesn't affect eligibility for Medicaid or SSI. However, there are limits on how much money can be put into an ABLE account each year. And only people whose disability started before they turned 26 can open an ABLE account.
A Spendthrift Trust helps protect beneficiaries' finances by limiting their direct access to trust assets. While it's not specifically for people with disabilities, it can safeguard assets from creditors or reckless spending. However, unlike SNTs, it may not maintain Medicaid or SSI eligibility, making it less suitable for beneficiaries who rely on these benefits.
We understand how important it is for families to protect their loved ones' eligibility for benefits. Setting up a Supplemental Needs Trust can help people with disabilities preserve their assets without compromising eligibility for Medicaid programs. For those exploring Structured Family Caregiving, a properly established trust can be a key step in qualifying for these benefits while securing compensation for caregiving services.
