Receiving Public Benefits and Other Benefits, too
A special needs trust makes it possible for a person who is receiving public benefits to receive some private benefits, too. For example, suppose that Clifford is receiving SSI. The law allows him to own no more than $2,000 in liquid resources. What if his aunt Marsha dies, leaving him $20,000.00? When Clifford receives the $20,000, he will own more assets than the law allows him to own and still keep his SSI benefits. The result will be that he will lose SSI. When he loses his SSI, he also looses his entitlement to other programs, like Medicare. If Aunt Marsha had set up a special needs trust, she could have left the same $20,000 to that special needs trust. Clifford would get some benefit from the $20,000, and Clifford would not be deprived of his SSI and his Medicare.
The Perpective of those running the public benefits program
In order to understand how a Special Needs Trust makes such a difference in the outcome, it helps to see the world from the point of view of the Social Security Administration (SSA). SSA is tasked to pay for food and shelter for needy people. Clifford is needy because he has less than $2,000 in liquid resources. The minute he inherits $20,000, they think he has enough resources to pay for his own food and shelter. So they discontinue his benefits. Well, what if Aunt Marsha set up a plain old ordinary trust and said to her trustee (in the trust document) "hold this money for Clifford and give it to him in whatever amount will be required to maintain his health, education and maintenance in reasonable comfort."
The SSA will look at that trust and realize that Clifford has ready access to all the money that is in the trust that Aunt Marsha set up. Why? Because, if the trustee of the trust decided not to give Clifford any of the money in the trust, Clifford would be able to go to court and a judge would rule that the trustee has to give him as much money as it would take to pay for his health, education and maintenance, in reasonable comfort.
The Discretionary Nature of Special Needs Trusts
So suppose that Aunt Marsha set the trust up a little differently. Suppose that she worded it so that her trustee, call him "Tom", had complete discretion whether to pay any money to Clifford or not, and even if a court wanted to review Tom's decisions as trustee, it couldn't. Since Trustee Tom has complete discretion to spend or to refuse to spend, SSA would clearly see that Clifford has no way to compel payment to himself. Therefore, he really does not own the money. Therefore, he is poor. Therefore, he continues to qualify for SSI.
So all special needs trusts contain language giving the trustee complete discretion whether to pay Clifford, or not to pay Clifford. But there have been court cases that have denied public benefits to a person like Clifford, if the trust permitted Tom the Trustee to pay for any and all types of expenditures to or for Clifford. Remember that we said that the Social Security Administration pays for food and shelter for Clifford. Well, some court cases have said that if the trustee has the authority to pay for expenditures like food and shelter, then they "displace" the need for the Social Security Administration to pay for food and shelter, and therefore, Clifford does not need SSI. So most special needs trusts worth their salt will also include language that says that the trustee does not have the authority to make expenditures that displace public benefits.
First Party Special Needs Trusts
So far, all the examples have related to Aunt Marsha leaving an inheritance to Clifford, who is on SSI. In other words, we had a "third party", Aunt Marsha, potentially messing up Clifford's SSI eligibility, and then snatching victory from the jaws of defeat by setting up a third party special needs trust. Now we are going to look a a different example.
Suppose that Mary, age 35, is hit by a bus. She loses both her legs. She enrolls in the SSI program. A personal injury lawyer takes her case to court and gets her an award of $1 million. Mary is going to lose her SSI eligibility, unless someone does something fast. From the point of view of the Social Security Administration, Mary owns the $1 million that is personal injury settlement. But there are ways that Mary, as a "first party" can take action to preserve her SSI entitlement. She can create a special needs trust for herself. Or her parents or the court can create one for her. These are called "first party trusts". Unlike "Third Party" trusts, when Mary dies, the money goes to pay back the state for what it has expended for Mary during her lifetime. But during Mary's lifetime, the first party special needs trust can pay for items beyond food and shelter that will greatly improve Mary's quality of life, like a wheelchair van or a personal companion.
In-Kind Support and Maintenance
It is easy to cause an SSI beneficiary to lose benefits. Every dollar that a special needs trustee pays direclty to the SSI recipient causes him or her to lose $1 of SSI. If the SSI benefit goes down to $0, the SSI recipient looses their Medicare. The rules further state that when the trustee provides benefits in-kind household benefits, instead of cash, SSI benefits are decreased by one-third. This sounds like a bad thing, but the SSI enrollee never goes down to $0 this way, and keeps her Medicare. The trustee of a special needs trust must be educated not to inadvertently cause the denial of benefits.
Hight Tax Rates and Bailing on Public Benefits
There are other issues that merit attention. Trusts get taxed at high rates. So you do not want to put more into a spcial needs trust than the special needs person will require. You also need to think about whether the trustee should be allowed to go "off-script" and spend the funds in a way that permits the disabled person to cease receiving public benefits.