Planning For The Financial Independence and Security of A Disabled Child

As an elder law attorney, I am often asked by a parent of a disabled child “How can I provide for my child’s financial needs when I am no longer alive?” People are concerned that, by leaving an inheritance directly to their disabled child, this will usually disqualify the child from most means tested public assistance programs. If the parents make an outright gift to another sibling can they be assured that this child will properly look after the disabled child? 

The solution to the problem is to create a trust known as a “supplemental needs trust” for the benefit of the disabled child. The purpose of the trust is to preserve eligibility for public assistance programs, such as Supplemental Security Income (SSI). In most states, eligibility for SSI automatically creates eligibility for Medicaid, which may be the only health insurance the disabled child is able to receive. In addition to maintaining public assistance eligibility, assets held in the supplement needs trust may be used to substantially improve the disabled child’s quality of life by providing goods and services above those provided by federal and state agencies.

There are two main types of trusts. The third party "supplemental needs trust" and the self-settled "special needs trust." The third party supplemental needs trust is a trust which is usually created with the assets of a parent or grandparent for the benefit of the disabled child. The trust may be created while the parent is alive or at death through a testamentary trust under the parent’s will or revocable trust. As long as the child cannot revoke the trust or compel distributions, assets held in the trust will not be considered an available resource and will not disqualify the child from receiving public assistance.

During the child’s lifetime, depending on the laws of your particular state, the trustees may be granted broad discretionary authority to use trust assets to purchase goods and services not otherwise available from governmental programs. These may include supplemental medical, dental, diagnostic work and treatment, nursing and attendant care, travel and entertainment, supplemental housing, support and transportation. In drafting the trust, the attorney will have to take into consideration both federal and state law. In some states the mere existence of the trustee’s ability to use trust assets to provide food, clothing or shelter will disqualify the child from receiving public benefits. However, in other states direct payments to third parties for food, clothing or shelter known as "in-kind support and maintenance" will only cause a reduction in the disabled child’s SSI for the month. 

Upon the death of the disabled child, assets held in the third party supplemental needs trust may pass to other family members and the trust is not required to reimburse the state for public assistance furnished to the disabled child under the state’s Medicaid program. 

What happens when a parent fails to create a supplemental needs trust, during lifetime or at death, and the disabled child receives their inheritance outright, or the child receives funds as a result of a personal injury award? Fortunately, all is not lost. Under the Omnibus Reconciliation Act of 1993 ("OBRA ‘93") Congress specifically authorized the transfer of assets to a self-settled special needs trust, also known as a "1396p(d)4(A) trust," as a means of preserving public benefits. Under OBRA ‘93, the trust must be funded with the assets of a disabled individual under 65 years of age, by a parent, grandparent, legal guardian or the court. As with the third party supplemental needs trust, the trustee may be granted authority to provide benefits over and above those provided by public or private financial assistance. 

The major drawback to the self-settled special needs trust is that, at the death of the beneficiary, the state will have to be reimbursed for Medicaid benefits provided to the disabled child prior to distribution of trust assets to other family members. 

In choosing a trustee to administer the trust, the family should consider the size of the trust assets, the financial ability of the individual and the expected duration of the trust. Where the assets of the trust are small the appointment of a family member who has some investment experience to serve as trustee may be the only practical solution. However, where the assets of the trust are substantial and the trust is anticipated to last for twenty or thirty years, the appointment of a corporate trustee to serve along with other family members is preferable. 

Whether the trust is created as a third party trust or a self-settled trust the advantages are many. The disabled child is able to secure immediate eligibility for public assistance such as SSI or Medicaid. While on Medicaid, the child is able to obtain services at significantly lower cost than the private pay rate. Some programs and services are only available through the Medicaid program. Even if the state Medicaid program has to be reimbursed once the trust is terminated, the availability of public assistance will permit the funds held in the trust to go further in improving the child’s quality of life. 

The attorney who drafts the supplemental needs trust must take into consideration a broad range of both public and private benefit programs, including Supplemental Security Income (SSI) and Medicaid, as well as income, gift and estate taxes issues. In addition to peace of mind, the greatest flexibility is achieved when the trust is set up by a parent or other third party either during lifetime or at death, rather than passing the funds on to the disabled child. As in many endeavors, the most successful outcome is achieved by planning ahead.