Dear Clients and Friends:
The world of Special Needs Trusts (SNTs) can be very confusing, as this question certainly points out.
Greetings. In your description of an SNT (in your last LISTEN TO LAWRENCE LETTER), you state that it doesn’t require a Medicaid payback and I’m wondering why that is because so much of my reading states that it’s a requirement – can you please explain this conundrum? Thank you.
As you all know if you are a regular reader of my LISTEN TO LAWRENCE LETTER, an SNT is a trust where money is held for the benefit of a person with disabilities without them jeopardizing their needs-based government benefits, like SSI and Medicaid. Today’s question focuses on what happens to the money in the trust upon the death of the beneficiary. Does Medicaid get paid back or can the money in the trust pass to other beneficiaries, like your other children or even charities? The answer will depend upon whether the trust is a FIRST PARTY SPECIAL NEEDS TRUST or a THIRD PARTY SPECIAL NEEDS TRUST.
A FIRST PARTY SPECIAL NEEDS TRUST is a trust that is funded with the beneficiary’s own assets. For example, your son inherited $30,000 from his grandmother. This inheritance would normally throw him over the SSI and Medicaid allowances and he would thus lose eligibility for these programs. However, if your son is under the age of 65, he is permitted to fund a FIRST PARTY SPECIAL NEEDS TRUST (first party because he is funding it with his own money). All the money in the trust can be spent on him for the rest of his life, all while maintaining his government benefits. The downside is that upon his death, Medicaid MUST be reimbursed first, before anyone else can benefit. The goal with these trusts is to spend down the money during the beneficiary’s life, if possible.
A THIRD PARTY SPECIAL NEEDS TRUST is a trust that is funded with someone else’s money. For example, a parent or grandparent creates and funds an SNT for their child or grandchild during their life, either in their last will and testament or in some type of living trust. Again, all the assets in the trust can be used to pay for anything the government doesn’t cover, for the balance of the life of the beneficiary. Upon the death of the beneficiary, there is NO PAYBACK. All the money in the trust at death can pass to anyone you want.
The bottom line: ask where the money came from to fund the trust and you will have a pretty good idea whether there will be a payback or not.