Sigman Janssen Legal Blog

Using Special Needs Trusts for Persons with Disabilities

March 21, 2013

I. Introduction

Prior to the use of special needs trusts for disabled individuals, family members often believed that the disabled individual in question must not receive any type of inheritance or other type of financial assistance or that individual would be disqualified from means-tested government benefit programs. The conventional estate plan, therefore, often resulted in these individuals being specifically excluded from inheritances from family members and also being excluded from any other lifetime transfers from generous relatives. With the use of a special needs trust, however, the disabled individual can be provided the means by which he or she can finance the lifestyle that the parents/family members want for the person with a disability. If an individual is disabled within the meaning of Social Security laws and is receiving public benefits, assets held in a properly drafted special needs trust for the benefit of the disabled individual will not be counted as an available resource.

There are two categories of special needs trusts: those created with the beneficiary’s assets (self-settled) and those created with someone else’s money (third-party). Third-party trusts are often called supplemental needs trusts.

II. Self-Settled Trusts

Self-settled trusts are, in the Medicaid context, trusts funded with the assets of the individual receiving public benefits. A self-settled special needs trust can be used to hold assets already owned by the individual or assets that the individual would otherwise receive directly, such as from a divorce settlement, a personal injury settlement, or an inheritance. It must include a provision requiring that Medicaid be paid back upon the beneficiary during his or her lifetime, to the extent that funds remain in the trust. There are other specific requirements under state and federal laws and regulations, as well as Social Security written instructions that set forth such requirements. A properly drafted special needs trust supplements but does not replace public benefits for which the beneficiary may be eligible. Specifically, the law allows the government benefit programs to continue to be the primary source of payment of the individual’s various expenses.

III. Third Party Trusts (Supplemental Needs Trusts)

Special needs trusts may also be funded with the assets of third parties. A third party special needs trust, also known as a “supplemental needs trust”, is one in which another person, such as a parent, establishes for a person with disabilities, and uses assets which do not belong to the disabled individual to fund the trust. Third party trusts provide wonderful opportunities in planning for a special needs family member, whether he or she is a child or an adult. If it is properly set up, there is no need to repay Medicaid out of this type of trust. Any balance upon death can pass to other family members, or whomever the trust creator wishes. This is a significant advantage to planning ahead for inheritances for disabled individuals.

IV. WisPACT Trusts

Both self-settled and third party special needs trusts can be established as part of a pooled trust. Instead of holding the assets of a single disabled person, a pooled trust holds the resources of many disabled beneficiaries in individual subaccounts for each beneficiary. The assets in the pooled trust are managed, administered and distributed by a non-profit association. In Wisconsin, the primary pooled special needs trust administrator is WisPACT (Wisconsin Pooled and Community Trust). More information about WisPACT trusts can be found at www.wispact.org.

If you need help setting up a special needs trust contact Appleton Attorney Bridget Erwin.