When estate planning involves a loved one with disabilities, special needs trusts become a critical tool. They allow individuals to receive an inheritance or other financial support without jeopardizing their access to crucial public benefits like Medicaid or Supplemental Security Income (SSI). In this article, we will explore the basics of special needs trusts, why they are essential, and the potential consequences of poor planning. We will also draw from a real-life scenario where a family’s estate plan failed to properly account for a special needs trust, leading to devastating results.
What Is a Special Needs Trust?
A special needs trust, also known as a supplemental needs trust, is a legal arrangement designed to benefit a person with disabilities without affecting their eligibility for means-tested government benefits. This type of trust allows assets to be set aside for the individual’s care, while ensuring that they can still receive public assistance like Medicaid, MassHealth (the Massachusetts Medicaid program), and SSI. Massachusetts, like other states, follows federal guidelines for Medicaid and SSI eligibility. A person with more than a certain threshold of income or assets cannot receive these benefits unless the excess resources are sheltered in a trust. Under the Massachusetts Uniform Trust Code (MUTC), special needs trusts are typically irrevocable, meaning the terms cannot be changed once the trust is established. One of the key features of a special needs trust is that the trust itself, not the individual, owns the assets. The trustee (who is responsible for managing the trust) can use the funds to pay for specific needs of the beneficiary, such as medical expenses, education, and other quality-of-life improvements. The funds from the trust, however, cannot be used for basic living expenses like food and shelter, which are covered by public benefits programs. A Real-Life Example: When Poor Planning Leads to Loss of Benefits Let’s take a closer look at a situation that highlights the importance of correctly structuring a special needs trust. Luke and Rachel were a married couple living in Massachusetts. After Rachel suffered a severe stroke, she was left cognitively impaired and needed ongoing medical care. To ensure that Rachel would continue to receive MassHealth and other public benefits, Luke established a special needs trust for her. This allowed Rachel to continue accessing her public benefits while also having the trust to cover additional costs that would enhance her quality of life. Luke made a mistake that many people in similar situations make. He mentioned to Rachel’s parents that if they wanted to leave anything to her in their will, they should name the special needs trust as the beneficiary. However, he didn’t stress the importance of this or follow up with their estate planning attorney. After Rachel’s parents passed away, Luke was shocked to find out that they had left an inheritance directly to Rachel, not to the trust. Because the inheritance was in Rachel’s name, she suddenly had too many assets to qualify for MassHealth and SSI. The unintended inheritance disqualified Rachel from these essential public benefits. This story serves as a cautionary tale: without clear communication and proper planning, even well-meaning actions can have severe consequences. Why You Need to Be Explicit in Estate Planning As seen in Luke and Rachel’s situation, a special needs trust can be rendered ineffective if a family member leaves an inheritance or financial gift directly to the person with disabilities. The inheritance goes directly to the individual, inflating their assets and causing them to lose eligibility for means-tested benefits. The Massachusetts Uniform Probate Code (MUPC) emphasizes the importance of precise language in estate documents. Any ambiguity in a will or trust document can lead to unintended consequences, as in Rachel’s case. If Rachel’s parents had simply named the special needs trust as the beneficiary of their estate, the assets would have been placed in the trust rather than going directly to Rachel. The trust could have continued to pay for her needs while preserving her eligibility for public benefits. To avoid these kinds of mistakes, it is crucial to have explicit conversations with family members about how their estate plans should interact with the special needs trust. Connecting their estate planning attorney with your own attorney who specializes in special needs planning ensures that everyone is on the same page and that there are no misunderstandings. How a Special Needs Trust Works Under the Massachusetts Uniform Trust Code (MUTC), a special needs trust can be structured in several ways. The most common types are the first-party and third-party special needs trusts.- First-Party Special Needs Trust: This type of trust is funded with the assets of the individual with disabilities. For example, if Rachel had received an inheritance before the creation of the trust, that money could have been placed into a first-party trust. However, Medicaid requires that any remaining funds in the trust be used to repay Medicaid upon the death of the beneficiary.
- Third-Party Special Needs Trust: A third-party trust is funded by someone other than the individual with disabilities, such as a parent or grandparent. In Rachel’s case, this is the trust that should have been named in her parents’ estate plan. Because it is funded by a third party, it does not require repayment to Medicaid after the beneficiary passes away.
- Massachusetts General Laws Chapter 190B: This section of the MUPC outlines the formalities for creating and executing a trust in the state.
- MassHealth Regulations (130 CMR 520.023): These regulations govern the financial eligibility criteria for MassHealth, including how trusts are treated for eligibility purposes.
- Supplemental Security Income (SSI) Federal Regulations: SSI eligibility rules are also crucial when drafting a special needs trust. These rules determine what counts as income or assets for a person receiving SSI, which is critical for maintaining benefits.
