As discussed in the previous posts on SSI, individuals with disabilities who receive SSI must meet a “resource eligibility test” and show less than $2,000 in convertible resources. SSI is designed only to provide financial help for food, shelter and clothing. Anything beyond these three things is outside the scope of SSI. In order to provide a higher standard of living for those living with disabilities, First and Third Special Needs Trusts “SNT” under Section 1917(d)(4)(A) of the Social Security Act are often utilized. Money and other assets held in these trusts can be used for education, additional medical bills, vocational training and other needs. Additionally, when drafted correctly, these trusts allow an SSI recipient to receive an inheritance, gift or other windfall without jeopardizing his or her monthly SSI checks.
It is important to distinguish between the two types of Special Needs Trusts to avoid what is commonly called a “disqualifying transfer” or to void a Medicaid Payoff Exemption. A First Party SNT is funded by the disabled person’s own money and the Trustee is subject to stringent rules and regulations. Generally, First Party SNTs are used by individuals who need to spend down in order to qualify for SSI. Usually money that needs to be spent down is the product of an inheritance, a legal settlement, a gift, lottery winnings or some other windfall. If the disabled person did not transfer this money into a First Party SNT, than he or she would be disqualified from SSI (and Medicaid) because of being “over asset.” Finally, the disabled person must be under the age of 65.
A Third Party SNT is funded by someone else’s money and allows the Trustee more leeway and discretion. Third Party SNTs are often established by parents or grandparents of disabled children who wish to provide them with additional financial security. The parents or grandparents will fund the trust with money that would have otherwise been inherited upon their death or fund it with an outright gift. There is no age limit for this trust which means it can be established and funded anytime in the disabled person’s life—even after the age of 65.
Because the money used to fund a First Party SNT was originally in the disabled person’s name and was only transferred into the Trust to allow to become SSI/Medicaid eligible (i.e having under $2,000 in assets) there is a Medicaid Payback provision. This means that when the disabled person dies, any money left in the Trust must be used to pay the Medicaid Lien. However, Third Party SNTs do not have a payback provision because the trust funds were never in the beneficiary’s name and Medicaid has no claim on the funds. This means that when the disabled person dies, then any remaining funds in the trust will be passed down to family members or subsequent trust beneficiaries and not Medicaid.
Money held in a First Party SNT must be used for the sole benefit of the disabled person. Ensuring that any disbursements from the trust are for the sole benefit of the disabled person is a relatively easy task if the disabled person is single, has no children and lives alone. It becomes tricky when the disabled person lives with family or friends, and the Trustee must ensure that others are not benefiting from the funds provided by the Trust. Failure to do so may result in a period of SSI ineligibility for the disabled person. Conversely, money held in Third Party SNT is not bound by the “sole benefit” language and the fact that other people may benefit from the Trust’s purchases will not affect the disabled person’s SSI eligibility.
To avoid fatal trust management errors, Trustees of First and Third Party SNT must trace the source of all money before deciding whether it should be used to fund a First Party or Third Party SNT. If a Trustee, on behalf of the disabled person, transfers money held in the disabled person’s name such as earnings or gifts to the Third Party Trust, the Trustee is improperly co-mingling assets. Should SSI notice that the origin of this money was a gift or earnings, and not directly from a third party, SSI will call it a disqualifying transfer and suspend the disabled person’s monthly SSI checks. Additionally, this action may also result in the Third Party SNT losing its Medicaid Payback Provision Exemption and leave the entire trust corpus vulnerable to a Medicaid lien payoff.
It is important to speak with a qualified Trusts Attorney about your specific needs and financial circumstances. Failure to draft the Trust correctly or fund it appropriately could disqualify a person from receiving SSI, Medicaid as well potentially void the Medicaid Payback Exemption.