Today, the cost of long-term care for the average American, whether in a nursing home or receiving care in one’s own home, is often out of reach. The cost of care far exceeds most incomes, except for the wealthiest Americans. As a result, Americans are relying more and more on Medicaid to pay for their long-term care when they become elderly or if they have special needs.

However, the income limit to be eligible to receive Medicaid is far lower than most American salaries. That leaves many Americans in a no-man’s land where they make too much to qualify for benefits but too little to be able to pay for the care they need.

Not to mention, Medicaid benefits are also rather paltry. In many cases, the benefits are hardly enough to cover the cost of long-term care let alone food, shelter, utilities, or other necessities. They also do not cover other costs like entertainment, vacation, craft supplies, fitness classes, or any of the other expenses that increase quality of life for individuals, particularly individuals with special needs.

In order to meet the demands of increased expenses while still helping individuals with special needs maintain eligibility for Medicaid, many people turn to special needs trusts.

What is a Special Needs Trust?

Special needs trusts can be a valuable planning tool for people with special needs.

To begin with, a trust is a relationship where one person gives another person the right and responsibility to hold property on their behalf or on behalf of someone else. The person who gives the property is called the grantor. The person who oversees and manages the property is called the trustee. And, the person who ultimately will receive the property is called the beneficiary.

In a trust relationship, the trustee is under certain requirements when managing the property. For example, they must operate under a duty of loyalty. The trustee also has a duty to act prudently. This means that the trustee must carefully manage the assets in the trust.

A special needs trust operates similarly. A person who qualifies (has a qualifying disability or illness) may take assets and put them into a trust. Those assets would typically be counted as income and likely cause the individual’s income to exceed the limits for Medicaid benefits.

A third party may set up the trust on behalf of an individual with special needs. For example, a parent may establish a special needs trust to benefit their child with special needs. Or, rather than naming an individual with special needs as a beneficiary in a will, a grandparent may direct that the individual with special needs receive their share of inheritance in a special needs trust. These are called third party trusts.

An individual with special needs may put income into a trust for their own benefit as well. Some individuals with special needs are able to work and earn an income. However, as mentioned above, the cost of their care may far exceed their income-earning potential. Thus, putting their income into a special needs trust may help the individual qualify for Medicaid assistance while still earning an income.

Sometimes an individual with special needs is awarded a personal injury settlement. In that instance, the individual may also wish to put the award into a special needs trust for their benefit in order to ensure that they are still able to qualify for Medicaid.

How Does a Special Needs Trust Impact Medicaid Planning?

Special needs trusts can be a critical element of Medicaid planning, because once put into a special needs trust, many assets no longer count as income for Medicaid purposes. Thus, the individual’s overall income is reduced to the point where the individual would still be able to benefit from Medicaid.

But, even if the individual is able to qualify for Medicaid, are they still able to use the assets they’ve put into a trust? Yes. The idea behind a special needs trust is that it is the best of both worlds for the individual with disabilities: they are able to reduce their countable income and qualify for Medicaid while still benefiting from extra income.

The extra income can make a significant difference to an individual’s quality of life. This income can be used to finance items that Medicaid does not fund like vacations, going to the movies, going out to eat, classes, clothes, and more.

Generally, the assets that are placed into a special needs trust must be irrevocable meaning they cannot be retrieved by the grantor once the assets are placed in the trust.

Also, assets that are left over when the beneficiary (the individual with special needs) passes away, are usually either subjected to Medicaid repayment rules (depending on the state) or must be donated to charity.

Should I Consult an Attorney to Create a Special Needs Trust?

Special needs planning can be quite complicated. Because Medicaid is a federally funded program but administered by each individual state, the rules pertaining to Medicaid vary from state to state and are very specific. If you have a loved one with special needs, contact an experienced estates attorney to learn more about how you can plan for your loved one’s financial future.