We write this article for you who may be disabled enough to receive public benefits, and for those of you who have loved ones who may be either developmentally or otherwise disabled and you are concerned about how to give funds to them without compromising their public benefits. You may want to bless your loved one now, while you are alive, or later through your estate plan. Regardless of when you don’t want your gifts to compromise their benefits.
It is a well-known fact that people (we’ll call Applicants) who receive needs-based public benefits can lose those benefits if they receive funds outright. Sometimes, because of the extent of public benefits programs, receiving even a small amount of funds could result in the Applicant losing benefits which could severely impact them. Some wait years on long waiting lists for certain benefits.
By receiving an inheritance or gift, the Applicant could lose a benefit they waited years to receive, use the funds up in a very short time period, and end up on another long waiting list. In a sense, the blessing of receiving assets turned out to be a curse.
Leaders in our government realized that the kinds of losses triggered by receiving assets can hurt applicants as well as the community. As a public policy they did not want people on benefits to end up worse off by receiving funds. So, the government authorized legal tools called supplemental needs or special needs trust (SNT) also known as a “D4A” trust. These types of trusts can successfully be used for both federal and state needs-based programs.
Originally, it was only expected that funds coming from injury or medical malpractice lawsuits would need to be protected. For those funds, a first party SNT would lock the funds in an irrevocable trust, allow the funds to be used for things the public benefits programs did not provide but not allow the Applicant to have any control or demand rights.
This first party SNT allowed the trustee to make purchases and give the Applicant a better quality of life without losing benefits.
The trustee could buy things like:
- Adaptive equipment
- Vacations and medical procedures not otherwise provided by the programs
- Even homes under certain circumstances
Of course, there are serious limitations on how the funds can be used.
With a first party SNT, when the Applicant dies, the state must be reimbursed for all funds paid out on behalf of the Applicant up to the full amount remaining in the trust. If any funds are left over the Applicant’s beneficiaries would receive those funds.
First Party SNT Exemplified
An example of a First Party SNT involves Tenisha who suffered major permanent injuries when she was injured at a theme park. Her injury lawsuit took several years to settle and in the meantime, she became eligible for public benefits.
The settlement turned out to be much less than hoped for and not sufficient to cover her expenses for life. In order to maintain her eligibility an elder law attorney created a first party SNT, naming a trustee to receive the proceeds.
Through her SNT Tenisha was able to have specialized medical equipment and even a place to live not provided by the public benefits program. When Tenisha died the funds remaining in the trust were turned over to the state. Because the bill was so high, nothing went to her heirs.
Sadly, because of this pay back provision, many families, in their estate plans, decide to disinherit the Applicant and instead, give the funds designated for the Applicant to another family member to dole out. Unfortunately, without legal protection for the Applicant, those family members sometimes would die, get divorced, or spend the funds as their own, and the Applicant would end up with nothing.
First Party SNT vs. Third Party SNT
Soon, estate planning and elder law attorneys developed the concept of the Third Party SNT. It is very similar to the above first party SNT with two differences:
- The funds come from another person and never belong to the Applicant. For instance, a parent or grandparent might create the trust on their own for the benefit of the disabled person or make this provision in their own trust or will. In Florida, and most states, this type of trust does not cause a loss of benefits.
- Because the Applicant cannot demand the funds are never given directly to the Applicant, the grantor, or person making the trust and giving the gift, can choose who will receive the proceeds upon the death of the Applicant. There is no need to pay back the state or federal government.
Third Party SNT Explained
The Third Party SNT is created with all the requirements of a SNT, so that it will not count as an asset to the Applicant. It could be a stand-alone trust, or a provision in the Grantor’s trust or will. The trustee must follow all of the rules of a SNT in making distributions. However, upon the death of the Applicant, proceeds do not go to the government but to the beneficiaries chosen by the grantor.
One can begin a third party SNT as a part of the estate plan, which is only funded upon death; or as a freestanding trust that can be funded immediately. The Freestanding Third Party SNT is particularly useful when the disabled person’s extended family wishes to give them funds too.
Third Party SNT Exemplified
For example: Joey was born with an intellectual and physical disability. Joey’s parents come from a large family that all care about Joey. Joey’s grandparents enjoy gifting funds each year to their grandchildren but were advised not to give any to Joey because of the loss of public benefits.
Joey’s parents created a Third Party SNT for Joey. It allowed all funds in the trust to be used for Joey’s benefit according to the SNT rules and upon Joey’s death, the remainder would go to Joey’s siblings (or wherever the parents chose).
Joey’s grandparents were able to make multiple gifts to Joey’s trust. Those funds could be used for Joey’s needs at any time without compromising Joey’s benefits and go according to the trust upon Joey’s passing.
Another example: Sam became disabled at a young age and received public benefits. Sam’s parents would like to give gifts to Sam but only wish to do so upon their passing. Also, they come from a small family and do not expect anyone else to be gifting to Sam.
Sam’s parents’ attorney included a third party SNT in their Last Wills that would become active only upon their passing. Sam’s parents had assets and life insurance and were able to leave those gifts to Sam’s trust so Sam could enjoy the gift without losing the public benefits.
Third Party SNTs can be the key to giving gifts to Joey and Sam without compromising their public benefits. However, the rules for creating them are inflexible and strict. If the rules are not followed in the planning and drafting stage or at the times of distribution, all could be lost. This is why it is advisable to have only a knowledgeable estate planning or elder law attorney prepare them and advise the trustee later on.
Long gone are the days of disinheriting a disabled loved one to preserve benefits. Contact your elder law attorney to ensure you have put the proper tools in place to bless and not accidentally harm your loved one.
For further information or to get started on your free consultation, contact our St. Petersburg attorneys.