Takeaways
- Special needs trusts (SNTs) help people with disabilities cover expenses while remaining eligible for needs-based government benefits such as Medicaid and Supplemental Security Income (SSI).
- Common mistakes, like giving the beneficiary cash gifts or directly paying for their housing costs, may lead to a reduction or loss of their SSI and Medicaid benefits.
When managed correctly, a special needs trust (SNT) can help a person with a disability cover certain expenses while keeping their Medicaid and Supplemental Security Income (SSI) benefits.
Managing an SNT takes knowledge and care. A trustee, who responsible for making distributions from the trust and handling other financial decisions, may be a family member of the person with a disability, who is the beneficiary of the trust.
Even well-intentioned trustees and family members can make mistakes. This is especially true when the beneficiary receives SSI, Medicaid, or other needs-based benefits with strict eligibility criteria. Trustees must understand the rules governing the trust and any public benefits the beneficiary receives. Otherwise, mistakes can put those benefits at risk.
Family members can also put benefits at risk. Common mistakes include giving money directly to the beneficiary or covering housing costs. These mistakes can result in forfeiture of benefits like Medicaid or SSI because it is easy to exceed the stringent income and asset limits these programs impose. This can be a serious loss for the beneficiary, as it can lead to losing financial support for food, shelter, or medical care.
In many cases, SNTs are set up to preserve benefits access, but a family member’s oversight can jeopardize this.
Why Special Needs Trust Mistakes Matter
Awareness of the common mistakes SNT trustees and family members can make is important. Avoiding common SNT pitfalls can help the trust provide the beneficiary with financial stability and preserve benefits access.
Two common mistakes made by SNT trustees or other family members are giving cash gifts to the person with a disability and covering rent. These mistakes can cause a reduction or loss of certain essential benefits.
1. Cash Gifts
Receiving cash can put benefits at risk. This includes money from the trustee or from a loved one. The Social Security Administration (SSA) considers receiving money from a special needs trust as income. Cash, checks, and gift cards to the person with a disability count as income for programs such as SSI. The same rule applies when a loved one gives cash directly to the beneficiary. It also applies when someone leaves an inheritance directly to the beneficiary instead of the trust.
Cash distributions can result in a suspension, reduction, or total loss of benefits. Supplemental Security Income is for people with little to no income and resources and who have a disability or are older than 64. Generally, SSI recipients cannot have more than $2,000 in assets to their name. A direct cash gift may therefore disqualify someone from SSI if the gift pushes them above that resource limit.
In most states, people who receive SSI also qualify for Medicaid, which provides health insurance. Like SSI, Medicaid has income-based qualification criteria, which vary based on state, marital status, and other factors. Receiving too much cash from an SNT or as a gift from a family member can cause someone to lose Medicaid as well.
Instead of giving the beneficiary a direct cash payment, the trustee can use the trust funds to pay for certain expenses directly. For instance, imagine a person with a disability wants to take a class and asks the trustee for money. Rather than giving the beneficiary cash, the trustee can pay the educational institution directly. This avoids the money counting toward the SSI and Medicaid limits.
Family members can also cover certain expenses directly or put money in the trust.
2. Paying Rent
Families often make a second mistake by paying for rent for a loved on with a disability. Before doing so, they should understand how the payment may reduce SSI benefits. In some situations, paying rent still makes sense. However, families should first understand the SSI consequences.
When a trustee of a special needs trust or a loved one pays rent for the beneficiary, the SSA considers this a type of income called in-kind income or in-kind support and maintenance (ISM). These expenses include rent, mortgage payments, and utilities paid for by someone else. The SSA reduces the SSI benefit by up to one-third as a result. SSI recipients may also see this reduction when they live with their families and do not pay rent.
Because SSI benefits may be lower than housing costs, particularly in high-cost areas, it can still make sense for the SNT or a family member to cover the cost of housing — especially when there are no good alternatives.
However, families should be aware of this rule to help their disabled loved one budget for the one-third reduction in benefits. Where SSI benefits are already lowered by other income, the one-third reduction can also completely eliminate the benefit. If the person with a disability can afford rent without needing to rely on the trust fund or a family member’s generosity, this can help them maintain their SSI benefits.
For people with disabilities living at home, families can sometimes avoid the one-third SSI reduction by having their disabled loved one pay rent. For instance, they can use their SSI benefit to pay their fair share of rent to their family members, preserving the full benefit.
Avoiding Mistakes
Families can take several steps to avoid these common pitfalls of SNTs.
- Work with professionals familiar with special needs trusts. The rules governing SNTs and public benefits programs can be complex. Hired professionals such as attorneys, financial planners, and professional trustees should be familiar with these rules.
- Trustee training can especially be helpful for family members stepping into the trustee role. This training, or general family education on SNT rules, can help educate the rest of the family about how best to financially support the person with a disability while preserving access to benefits.
- Trustees should also review the activity and accounting regularly to ensure any distributions are in accordance with the trust’s terms and support continued benefits access.