As long as certain conditions are met, a disabled person (or someone acting on his behalf) can establish a special needs trust to manage his property, without jeopardizing his eligibility for need-based government benefits. Known as a “first-party special needs trust”, or first-party SNT, this financial vehicle is one of the most popular ways of meeting the needs of a disabled person who holds significant financial resources.

The Problem

The problem with managing the finances of a disabled beneficiary is that he is likely to require government benefits, such as Supplemental Security Income (SSI) and Medicaid, to support his lifestyle. If he was born disabled, or became disabled without accumulating a significant work history, he is likely to be ineligible for Social Security Disability (SSDI) and Medicare, perhaps leaving SSI and Medicaid as his only viable alternatives.

SSI and Medicaid, however, are means-tested, which means that in order to remain eligible for these benefits, the recipient must prove that he is poor enough to need them. If he receives more than a certain amount of income, he will be ruled ineligible for these benefits. That is why setting up an ordinary trust for a disabled beneficiary can ultimately cost more than it is worth.

Illustrative Example

Ed becomes totally disabled after a devastating motorcycle accident. He is ineligible for SSDI and Medicare because he did not accumulate a sufficient work history prior to his accident. He begins receiving SSI and Medicaid benefits while pursuing a personal injury lawsuit against the driver who caused the accident.

Ed wins $800,000 in the lawsuit, but he is advised to place his money into a trust. There is no tax problem here–personal injury lawsuit proceeds are not considered taxable income by the IRS.  The problem here is that if the trust disburses $3,000 a month to him as planned, both SSI and Medicaid will cancel their benefits since he will no longer considered to be in financial need.  

The Solution

Ed’s can preserve his eligibility for SSI and Medicaid while receiving monthly disbursements from his lawsuit settlement at the same time, by establishing a third-party SNT under state and federal law. To establish a first-party SNT in his favor, he must meet the following conditions:

• He must be legally disabled; 
• He must be under 65 when the trust is established (transfer penalties will apply if he uses it after reaching the age of 65);. 
• The trust must be funded with assets he already owned or was entitled to before the trust was established; 
• The trust must be established by Ed or on his behalf by his parent, grandparent or legal guardian, or a court; 
• The trust must be established for Ed’s sole benefit; and
• The trust must contain a provision obligating it to reimburse the state of Florida after Ed dies for any Medicaid benefits that Ed received during his lifetime.

Don’t Let the Glue of Circumstance Harden Underneath Your Feet

The longer you wait to take steps to protect your disabled loved one, the narrower your options could become. If you are considering setting up a special needs trust for a disabled loved one, contact trusts and estates attorney Jose Lorenzo by calling (305) 999-5411, completing our online contact form or visiting one of our offices in Coral Gables and Ft. Lauderdale. We serve clients throughout the entire state of Florida.