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Estate Planning - FAQ: Supplemental Needs Trusts

Q: How much money can a person on SSI and Medicaid have before losing their benefits?

A: In 2004, the SSI (Supplemental Security Income) program only allows people to retain $2000 in resources. While the Medicaid program limits are slightly more ($3950 in 2004), most people with severe disabilities are eligible for Medicaid by virtue of their status as SSI recipients and must meet the more stringent $2000 limitation. If an SSI recipient inherits more than $2000, even as a beneficiary on a life insurance policy, pension or retirement plan, SSI will be terminated and an overpayment may result.

Q:How can I leave money for my child when I die without jeopardizing her benefits?

A: You can create a supplemental needs trust (SNT). This can be done either as a free-standing document which you create and fund during your lifetime, or it can be included in your will to be funded at your death. A supplemental needs trust allows you to set aside money for your child's needs and desires beyond food, clothing, shelter and medical care. If the trust is properly drafted, Medicaid and SSI will not count the assets of the trust in determining eligibility. In other words, you may leave assets in excess of $2000 to your child in an SNT and it will not jeopardize her eligibility for public benefits.

Q:Should I disinherit my child?

A: Disinheritance was a common strategy prior to the codification of supplemental needs trusts. It is natural to want all of your children to benefit from the money you have saved; certainly a child with a permanent disability is likely to need those resources more than other children who will be self-supporting. Disinheritance is an emotionally-charged decision for you and your family. Because establishing a supplemental needs trust will allow you to benefit your child without causing public benefits to be terminated, it is the preferred option in most cases.

Q:Should I leave "extra" money to my other children so they can take care of their brother?

A: Again, this type of arrangement was common before the advent of supplemental needs trusts. It is important to realize, however, that your other children will have no legal obligation to safeguard the additional funds for their sibling's benefit. The funds may be vulnerable to attachment in cases of divorce or bankruptcy. This type of financial arrangement may also cause friction amongst the siblings. Establishing a supplemental needs trust will address the issue of benefit eligibility while ensuring that the money is segregated from the trustee's personal funds.

Q:What can a supplemental trust pay for?

A: A supplemental needs trust can pay for any items and services that Medicaid and SSI are not intended to cover. Medicaid is intended to cover most medical services, and SSI is intended to cover food, clothing and shelter. Examples of what may be paid from an SNT are: furniture, computer equipment, recreational activities and equipment, transportation expenses, vacation expenses, burial arrangements, telephone bills, cable and internet bills and medical care that is not covered by Medicaid, such as cosmetic or experimental treatment.

Q:How is the trust funded?

A: You can either fund the trust during your lifetime by making periodic or lump sum contributions or the trust can be funded at your death with a share of your estate. Many individuals choose to purchase a separate life insurance policy to fund the trust, or to designate the trust as a beneficiary of an individual retirement account (IRA) or other retirement plan.

Q:Who should be the trustee?

A: Any person over 18 who is not a convicted felon may serve as trustee. It is important to choose someone whom you trust to provide for your child and to fulfill your wishes as reflected in the trust document. Most people choose another adult child or a close family member or friend. If there is no such person available or willing to serve, there are several nonprofit agencies who will fulfill this role. For larger trusts, banks and brokerage houses are other options.

Q:What do I need to do to set up a supplemental needs trust in my Will?

A: The first step is to meet with an attorney experienced in estate planning for parents of disabled children. The attorney will conduct an indepth interview to gather information about your family, the people you would like to name as beneficiaries of your will, the needs of your disabled child and the nature and size of your estate. The attorney will then draft a will which will take into consideration all of your goals and incorporate a supplemental needs trust for your disabled child. Trusts are complex legal documents; because an improperly drafted trust could result in loss of Medicaid or SSI for your child, it is crucial to choose an attorney with significant experience in this area. Linda A. Geraci has been assisting families establish supplemental needs trusts for over 10 years. We are fully familiar with the concerns of parents of disabled children and with the laws governing supplemental needs trusts.

Q:I didn't know my mother had designated my child on Medicaid as beneficiary of her life insurance policy. My child will be receiving $100,000.00. Is there anything I can do to keep this money and not lose benefits?

A: Even if, despite your proper advance planning, you learn that your child will inherit money from another source, you can still place those funds into a supplemental needs trust. This type of supplemental needs trust is called a self-settled or first-party SNT because it is created with funds whose ownership has already vested in the disabled person. Depending on the circumstances, the trust may have to be approved by the local Surrogate's Court. There may be a loss of benefits for one or several months after receipt of the money while the trust is being set up. Once it is established your child can transfer the $100,000.00 to the SNT and continue to receive Medicaid.

Q:What are the differences between a self-settled (or first-party) trust and a third party trust?

A: There are three main differences between a self-settled and a third-party SNT:

  • a self-settled trust is funded with assets belonging to a person with a disability and a third party trust is funded by anyone else, such as parents or grandparents, either during lifetime or in their will;
  • a self-settled trust sometimes requires Court approval if there is no parent, grandparent, or guardian to establish the trust; and
  • a self-settled trust must contain a provision that any funds remaining in the trust at the beneficiary's death will be paid to the Department of Social Services as reimbursement for Medicaid paid out during the lifetime of the beneficiary.

Q:I am afraid setting up a trust will be expensive. Are there any alternatives?

A: If you have a child who is expected to be dependent on SSI and Medicaid for basic needs and medical care, a supplemental needs trust is the only alternative which will accomplish the three objectives most parents of disabled children have:

  • to set aside a fund of money to enhance your child's quality of life;
  • to ensure that he or she remains eligible for SSI and Medicaid which provide for basic needs and expenses; and
  • to designate a trustee who will prudently invest and manage the money you have accumulated when your child does not have the ability to manage a large sum of money.
The fee that you will pay to establish an SNT is minimal compared to the assets that will be spent paying for services at a higher private rate if proper planning is not done and access to SSI and Medicaid is lost. In order to ensure a stable financial future for your child, it is essential to invest in retaining a competent attorney to coordinate and implement an estate plan which will accomplish all your objectives.

Q:If the Court appoints me as a Trustee, are there any special requirements or restrictions?

A: You will be bound to follow the terms of the trust, as well as any additional requirements that may be included in the Court's Order. Generally, court-appointed trustees must post a bond and submit annual accountings to the Court.

Q:Do I need to first file for guardianship before I can be appointed Trustee?

A: If Court approval of an SNT is necessary, courts in some areas of the state require that you be appointed guardian, either under Surrogate's Court Article 17-A or Mental Hygiene Law Article 81 prior to petitioning for appointment as trustee. However, we have on many occasions obtained approval of an SNT by filing a "miscellaneous proceeding" under the Surrogate's Court Procedure Act without also petitioning for guardianship. If your circumstances dictate that a self-settled, or first-party, trust be created, it is crucial to consult with an experienced attorney regarding the applicable procedural options.

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