Supplemental Needs (or “Special Needs”) Trusts

Kristen R. Testaverde, Esq.  krtestaverde@gmail.com

Supplemental needs (or special needs) trusts are trusts used to benefit a disabled person while not harming his/her eligibility to receive public benefits (please see below for the definition of “disabled”).  Parents often create these trusts for the benefit of disabled children, both during their lifetimes and as part of their postmortem estate planning.  A disabled person may also use the supplemental needs trusts to protect his or her own funds, which may be from a personal injury award, life insurance, or an inheritance.

How it works:  Eligibility for government benefits is based upon a person’s own asset availability.  A supplemental needs trust keeps assets out of the disabled person’s personal estate.  To keep the assets separate, the trust must be irrevocable, provide no authority to the beneficiary to make distributions, distributions must be completely within the discretion of the trustee, and the trust should state its purpose to supplement, but not supplant, public benefits.       

Who is eligible:  A person is considered “disabled” for the purposes of such trusts if he/she is unable to “engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months.”  42 U.S.C. 1382c. 

A disabled individual under the age of 65 can fund a supplemental needs trust so long as it is established by his/her parent, grandparent, legal guardian, or by a court.  The trust must provide that at the beneficiary’s death, the remaining funds will first be used to reimburse the state for benefits paid on the beneficiary’s behalf during his/her lifetime.  These types of trust are commonly referred to as (d)(4)(A) Trusts, based on the federal statute which permits their existence. 

For those over individuals over 65, or those under 65 who are unable to create a (d)(4)(A) trust, assets can be placed in a “pooled trust” to preserve his/her assets and to supplement government benefits.  Pooled trusts are established by not-for-profit organizations and individuals place funds in these trusts.  The funds are used for the benefit of the disabled person during his/her life, and does not require payback if the remaining funds remain in the trust for the benefit of other disabled individuals. 

What does “supplement” mean?:  Payments from the trust are not made directly to the beneficiary, but on his/her behalf to provide those things that government benefits cannot, such as educational courses, travel, movies, recreation, and health services not otherwise provided.  Funds used for necessities, which are considered “in-kind” income, can reduce benefits.  In-kind income includes necessities, such as food and housing (but clothing has been removed from this list).  The trustee of a supplemental needs trust should be counseled by an attorney on the proper use of the trust funds. 

In short, supplemental needs trusts are a method of protecting the assets of disabled individuals, both over and under 65.  

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