Medicaid is a vital source of health insurance for many people with disabilities. It provides necessary coverage, especially for those with limited financial resources.
Alongside Medicaid, Supplemental Security Income (SSI) offers a modest monthly stipend to individuals with disabilities who cannot earn sufficient income.
However, navigating Medicaid’s rules, especially regarding inheritances, can be tricky. If you’re planning to leave an inheritance to someone with disabilities, it’s crucial to understand how a special needs trust works and how Medicaid may interact with it.
Preservation of Need-Based Benefits
A special needs trust, also called a supplemental needs trust, is designed to preserve access to Medicaid and SSI while allowing a beneficiary to receive financial support. Since Medicaid and SSI are need-based, receiving too much money directly could disqualify them from these programs.
In such a situation, a first-party (or self-settled) special needs trust can be established to preserve eligibility. The assets are placed into the trust, and a trustee is appointed to manage the funds.
The beneficiary does not have direct access to the money in the trust, which allows them to remain eligible for benefits.
The trustee can use the trust’s assets to meet the beneficiary’s supplemental needs, which include items and services that improve their quality of life but are not considered essential for daily living. These could include:
- Vacations
- Educational expenses
- Hobbies or recreational activities
- A specially equipped vehicle
- Medical treatments not covered by Medicaid
- Dental care
- Assistive devices, such as computers or hearing aids
However, if the trust funds are used for basic needs such as food or shelter, SSI payments may be reduced. For example, if the trustee uses the funds to cover rent or groceries, SSI benefits can be reduced by up to one-third of the maximum amount plus $20.
Despite this, if the beneficiary resides in a home owned by the trust, SSI payments remain unaffected.
Medicaid Estate Recovery
Medicaid is required to seek reimbursement from a deceased beneficiary’s estate to recover costs paid for their care. This is called Medicaid estate recovery.
Usually, Medicaid won’t recover much from an individual’s estate because Medicaid recipients are limited to $2,000 in countable assets, meaning most don’t leave behind significant estates.
However, Medicaid can seek reimbursement from the remainder of a special needs trust if the trust is a first-party trust. First-party trusts are established with the disabled individual’s own money, often from a legal settlement, inheritance, or savings.
While the trust allows the beneficiary to maintain Medicaid eligibility during their lifetime, Medicaid can claim the remaining assets in the trust after the beneficiary dies.
Third-Party Special Needs Trusts and Medicaid
If your goal is to provide for a loved one with a disability, it’s crucial to avoid leaving them a direct inheritance with the expectation that they’ll set up a trust themselves. A better solution is a third-party special needs trust.
A third-party special needs trust is funded by someone other than the beneficiary, such as a parent or grandparent. The assets placed in this type of trust do not belong to the beneficiary. As a result, Medicaid has no claim to these funds, even after the beneficiary passes away.
You can also designate a successor beneficiary to receive any remaining assets after the original beneficiary passes away. This ensures that the funds remain protected from Medicaid estate recovery and are distributed according to your wishes.
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