If you have included a special needs trust as part of your estate plan, you need to know the importance of making sure the distributions from that trust are permissible per the terms of the trust and do not defeat the purpose of the trust by affecting eligibility for needed government programs.
Effect of Distribution
A special needs trust is one way to supplement the needs of a disabled loved one without compromising eligibility for means-tested government benefits, including Supplemental Security Income and Medicaid coverage. With respect to means-tested programs, federal law will require a reduction in benefits to the extent the beneficiary receives income or assets are otherwise made available to the beneficiary. For example:
- cash distributions from a special needs trust to the beneficiary will generally reduce benefits dollar for dollar;
- distributions made to third parties for food and shelter for the beneficiary will reduce benefits (“food and shelter” include food, mortgage payments, property taxes, rent, heating, gas, electricity, water, sewer, and garbage removal); and
- distributions of property made to third parties for the beneficiary that are not easily converted to cash, food, or shelter will likely not serve to reduce benefits, but property that can be easily converted to cash will be considered as cash equal to the fair market value of the property.
Distributions That Will Not Affect Benefits
De Minimis Gifts. With respect to Supplemental Security Income, the above rules do not apply to the first $20 per month received by the beneficiary, regardless of purpose or form
Certain Personal Items and Transportation. Payments for the purchase of items such as clothing and furnishings will not serve to reduce benefits so long as such items are not included as food or shelter. Transportation provided to the beneficiary is also excluded as an available resource and will generally not affect benefits.
Burial and Funeral Arrangements. A special needs trust may purchase burial space and pre-pay funeral costs for the beneficiary without penalizing the beneficiary or being included as an available resource.
Loans to the Beneficiary. A special needs trust may extend a bona fide loan to the beneficiary. It is important that any loan include feasible payment terms and be sufficiently documented.
Educational and Vocational Services. Payments for education and vocational services will likely not affect benefits as long as such disbursements are not for food and shelter, e.g., room and board.
Medical Expenses. Any distribution made for medical or dental care will not be characterized as income or otherwise reduce benefits.
Planning Your Distributions
Establishing a special needs trust is a way to help a disabled loved one receive supplemental benefits needed for their care and comfort. When making distributions from a special needs trust to the beneficiary or for their benefit, you need to consider the effect on existing government benefits and eligibility.