Modern Estate Planning Blog

At Chubb Law Firm PC in Folsom, we often meet Sacramento-area families who want to support a loved one with special needs but are afraid of accidentally disrupting their Medicaid or SSI benefits. That concern is valid, because even small increases in assets can cause someone to lose essential medical coverage. Special needs trusts (SNTs) enable individuals with disabilities to receive financial support without losing eligibility for needs-based government benefits like Medicaid and SSI.

The Challenge of Needs-Based Benefits

More than one in three people with disabilities rely on Medicaid, according to the Kaiser Family Foundation. Jointly funded by states and the federal government, Medicaid is a public assistance program that provides health insurance to people with limited income and resources, including those with disabilities.

Because Medicaid is needs-based, qualifying for it requires meeting strict financial limits on income and assets. Exceeding those limits even by a small amount can mean losing essential medical coverage.

A special needs trust (SNT) can help people with disabilities meet these requirements and maintain their eligibility for Medicaid and other needs-based assistance such as Supplemental Security Income (SSI), while still receiving financial support.

Qualifying for Medicaid and SSI

To qualify, the Medicaid and SSI programs generally limit recipients to no more than $2,000 in countable resources for an individual. (Note that some states have different limits for Medicaid.) SSI recipients must also meet specific disability or age requirements.

In most states, qualifying for SSI automatically qualifies a person for Medicaid.

Some states also expanded Medicaid access under the Affordable Care Act, which allows people to qualify for Medicaid based on income alone. However, if the person needs long-term care services or home- or community-based services (HCBS) waivers, they often must still meet strict resource limits, making an SNT necessary.

Because Medicaid and SSI are sensitive to changes in assets, even a well-meaning gift or inheritance can unintentionally disqualify someone from receiving benefits. For example, if a family member leaves a direct inheritance to a disabled adult who receives SSI and Medicaid, that windfall could push them over the eligibility limit. Similarly, a personal injury settlement deposited into the disabled person’s bank account could cause them to lose their benefits.

How Special Needs Trusts Help Protect Benefits

A special needs trust can help prevent this problem. When assets are placed in an SNT, they are generally not counted for purposes of Medicaid or SSI eligibility because the funds are held by the trust and not directly by the beneficiary, as well as meeting other requirements.

The trustee manages the funds and uses them to pay for goods and services that supplement, rather than replace, public benefits. Trustees must follow strict distribution rules and may need to provide regular reports to state Medicaid agencies. If the trustee gives cash to the beneficiary, it counts as income and may reduce or jeopardize essential benefits.

An SNT can pay for supplemental needs to improve quality of life. This may include private education, recreation, or medical and dental care not covered by Medicaid.

The trustee plays a critical role in ensuring that trust assets do not jeopardize assets. Trustee responsibilities include exercising full discretion over distribution, ensuring that distributions comply with SSI and Medicaid rules, keeping accurate records, and providing required reports to state agencies.

Types of Special Needs Trusts

The three common types of special needs trusts are first-party, third-party, and pooled SNTs.

• First-party special needs trust. This type of trust is funded with the beneficiary’s own assets, such as an inheritance or lawsuit settlement. It must include a Medicaid payback provision.
• Third-party SNT. Third-party SNTs are funded with assets belonging to someone other than the beneficiary (such as a parent). It does not require a Medicaid payback and is often used as a key part of a loved one’s estate plan.
• Pooled trusts. These trusts are managed by a nonprofit organization that manages assets in a common fund for many beneficiaries.

With a first-party SNT, federal law requires that upon the death of the beneficiary, remaining funds must first be used to repay any state Medicaid program for benefits paid during the beneficiary’s lifetime. This Medicaid payback requirement is the single biggest difference between first- and third-party SNTs. If assets remain after payback, then they can be distributed to secondary beneficiaries.

Special needs trusts allow people with disabilities to receive supplemental financial support while maintaining access to vital public programs. For those who rely on Medicaid and SSI, receiving an inheritance or settlement doesn’t have to mean losing benefits. A properly drafted SNT can protect their eligibility while improving their quality of life.

For families across Sacramento navigating how to protect benefits while still planning for a loved one’s future, a special needs trust can make all the difference. Our team at Chubb Law Firm PC helps parents, caregivers, and individuals understand their options and create plans that safeguard benefits while supporting long-term quality of life. To learn more or get guidance tailored to your family’s situation, call (916) 241-9661 to schedule a free Discovery Call.

‍

‍