Supplemental Needs Trusts
An explanation of supplemental needs trusts and the difference between first party and third party trusts.
Supplemental Needs TrustsSupplemental needs trusts (SNT) are designed to provide funds for a disabled, blind, or aged person to maintain or enhance the person's quality of life while also ensuring that certain government benefits are not taken away. A properly drafted supplemental needs trust protects trust funds from being considered "available" or "counted" for means-tested government benefit eligibility. “Means-tested” means a benefit that is only given to people who meet the financial qualifications. If an individual is receiving means-tested benefits or might receive them in the future, a supplemental needs trust may be appropriate to avoid disqualification from those government programs.
To receive means-tested government benefits, an individual's assets and income will be examined to determine if they are eligible. If there are assets and income available to pay for an individual's basic needs, such as food and shelter, then the amount of government benefits can be reduced or taken away. A supplemental needs trust is drafted with specific provisions to restrict the trust funds from being available for the beneficiary's basic needs, so that the funds do not affect eligibility for means-tested government benefits. Common means-tested government benefits include Supplemental Security Income ("SSI") and Medicaid.
Government programs providing benefits that are not means-tested are often referred to as entitlement benefits. These benefits do not contain the same strict financial eligibility limits as means-tested government benefits. Common entitlement benefits include Social Security Disability Insurance ("SSDI)" and Medicare.
First Party and Third Party Supplemental Needs TrustsFirst-party supplemental needs trusts are often referred to as "payback trusts." A first-party supplemental needs trust is established with funds that belong to the disabled individual. First-party supplemental needs trusts are controlled by a federal act, the Omnibus Reconciliation Act of 1993 ("OBRA"). OBRA provides certain requirements for the funds to not be considered for eligibility of means-tested benefits. The first-party supplemental needs trust must:
• Benefit an individual who is disabled as defined by the Social Security Administration;
• Benefit an individual under the age of 65;
• Contain only the disabled individual's own assets;
• Be set up by a parent, grandparent, legal guardian or conservator, or a court;
• Include a "pay-back provision" stating that upon the disabled beneficiary's death, any state that provided Medicaid assistance to the disabled person can demand reimbursement from the trust for the amount the Medicaid agency spent assisting the disabled person.
What distinguishes a third-party supplemental needs trust from a first-party supplemental needs trust is the source of funds used to establish the trust. A third-party supplemental needs trust is funded with assets belonging to someone other than the disabled beneficiary. Third-party supplemental needs trusts are more common than first-party supplemental needs trusts.
Third-party supplemental needs trusts are often set up by parents, grandparents, and other family members to provide and protect funds for a disabled individual who is receiving or may receive means-tested government benefits in the future. The parents, grandparents, or other family members who set up the trust are referred to as the trust Grantors or Settlors. The Settlors have the right to choose where any remaining funds will go on the death of the disabled person. Third-party supplemental needs trust funds are not subject to recovery under payback rules after the disabled person's death and will not be handed over to the state.