CASE STUDY - Third Party Special Needs Trusts

Minnie was a widow and had two adult children. Her son David had autism and some health problems. He lived alone in his own apartment and functioned independently, but worked only minimally and had a small income. His mother helped out with necessities and with extra cash and of course assisted and took care of him in many other ways. David had long been covered by Medicaid, a public healthcare benefit that paid for his very expensive prescription medications.

Minnie wanted to provide for him securely after she was gone, but if she left an inheritance directly to David, he would become ineligible for Medicaid. Medicaid is for people who don't have much income or assets.

She could decide to leave David’s share of the inheritance to her daughter Sally instead, and she trusted Sally 1000%... But if something happened to Sally, she wasn't as certain that she could rely informally on Sally's husband to use the money for David (and she really didn't trust her grandchildren to spend the money for their disabled uncle, either).

The solution was to create the right kind of special needs trust planning.

With our help, Minnie wrote a Will that included a "Supplemental Needs Only" special needs trust. The trust would make sure that David would stay eligible for needed coverage and still get the advantage of the inheritance from his mom. She named her daughter to be the Trustee. with her son-in-law as the official backup or successor.

When Minnie died the plan worked just as intended. David stayed eligible for health coverage to pay for his expensive prescription meds, and Sally also used his trust to buy him things that he needed, and that enriched his life. ,David got a much-needed new computer and TV, some furniture, new clothes to replace his old ones, and could still go out to a movie or a ballgame.

Here’s how the trust works to keep David eligible for needed public benefits. First, the trust is a "discretionary" trust: distributions are entirely within the discretion of the Trustee. David has no right to make the Trustee pay, and the trustee has no actual legal duty to support David. Second, the trust says that the money can only be spent in ways that will "supplement and add to, but never supplant or replace" other public benefits available for David's basic needs.

With these provisions, the Medicaid authorities agreed that the money was not owned by David individually or under his control; that it was not intended for his basic maintenance and support; and that overall it was not so closely tied to David as to be an "available resource" for him. If it were considered “available,” he would be ineligible for Medicaid.

This kind of special needs trust is called a "Third Party Trust" because money for the trust came not from David himself, but from his mother, a third party. A "First Party Trust” is different: it’s created with the disabled person's own money, such as from a settlement or an inheritance received directly. It’s rules are more stringent and less flexible. A Third-Party Trust like Minnie’s allows much more freedom in how the trust is created, who can administer it, and how the money can be spent.

Sometimes, a family member is not a good choice as Trustee for a special needs trust. For a disabled person with greater needs, a professional trustee organization is often a better choice. Not only does a nonprofit charitable trust or private trust company help by managing the money and fulfilling the complicated compliance and tax reporting, they often also have great expertise in helping people with disabilities. They know what services and benefits are available and can make sure the beneficiary gets everything they need, more so than a private individual can.

In part two of this series and beyond, I'll discuss First Party Trusts and additional strategies. At Marks Elder law, we help people every day with issues like these. I invite your questions and feedback. Please let me know how I can help you or your family.