Supplemental Needs Trust

Third-party special needs trusts are trusts funded with assets that the government benefits applicant had no legal right to at the time the trust was funded. Thus, the applicant cannot create a third-party special needs trust; rather, a third party must do that. Third-party special needs trusts are typically created as a receptacle for third-party donations. The trust ensures that the gifts to the applicant will not cause the applicant to lose their benefits.

Third-party trusts have numerous advantages over first-party trusts. Because third-party trusts are not made with the applicant’s assets, the trusts are not subject to mandatory Medicaid repayment. Additionally, third-party trusts can have multiple beneficiaries. Finally, a third-party trust may be revocable. Thus, a third-party special needs trust is almost always preferable to gifting assets directly to a disabled individual for the creation of a first-party trust.

There are two kinds of third-party special needs trusts: the supplemental needs trust and the qualifying special needs trust. This post explains the supplemental needs trust, which is more commonly used than the qualifying special needs trust. Indeed, a supplemental needs trust is just a general third-party special needs trust.

The applicant is the (or a) beneficiary of a supplemental needs trust. The goal of the trust is to provide the applicant with access to the trust assets without disqualifying the disabled individual from receiving Medicaid benefits.

Supplemental needs trusts are often utilized as an estate planning tool for relatives of a applicant. For Medicaid purposes, anything a disabled individual inherits is a countable asset.[1] Thus, a good estate planning attorney will inquire if any beneficiaries of the estate are currently receiving government benefits. If a beneficiary is receiving Medicaid benefits, the estate planning attorney ought to determine if the beneficiary already has a supplemental needs trust that the estate plan could utilize. If no such trust exists, the estate planning attorney will likely need to either create an inter vivos trust for the disabled individual or to write a testamentary supplemental needs trust into the estate plan.

Supplemental needs trusts are evaluated by the same policies, regardless of whether they are inter vivos or testamentary.[2] However, an inter vivos trust is typically preferable as it provides a means for other friends and family members to leave gifts or bequests without worrying about potentially negatively impacting the disabled individual’s Medicaid benefits.

[1] Inherited assets are generally countable before the estate has even been probated. ESS Public Assistance Policy Manual § 1640.0305.04.

[2] ESS Public Assistance Policy Manual § 1640.0576.03.