What is the difference between a sole benefit trust and a supplemental needs trust?

disabled client and her attorney in meeting

All supplemental needs trusts (“SNT”) are  created for the sole benefit of a disabled individual.  This type of trust is designed to provide support for a beneficiary without jeopardizing their receipt government benefits, namely Medicaid and SSI. In general, an individual receiving Medicaid or SSI can only have limited assets in their name. A supplemental needs trust provides funds that supplement not supplant the government benefits. The trust assets can be used to enhance the disabled individual’s quality of life. Some examples being clothes, entertainment, educational and recreational expenses, and transportation.

There are two main types of supplemental needs trusts, first party and third party. A first party supplemental needs trust is funded with the beneficiary’s own assets while the beneficiary is under age 65. This type of SNT may be created by the disabled individual, a parent, grandparent, guardian or the court.  Since the trust contains the disabled beneficiary’s assets, the trust must contain a “payback” provision. That is, if there are any assets left at the end of the beneficiary’s life, they must be used to pay back Medicaid for any cost of care expended. Only after Medicaid recoups can the remaining funds, if any, be distributed to other individuals.

A first party supplemental needs trust is most often created when the individual receives a legal settlement. A first party trust is also necessary when a disabled beneficiary receives an inheritance directly. Inheritances should ALWAYS pass to a disabled individual in a third party SNT to avoid the payback provision.

A third party supplemental needs trust is one created by a third party for the benefit of a disabled individual of any age and funded with that third party’s assets. It can be created during the life of the grantor or at the grantor’s death. The latter is a testamentary trust used to pass an inheritance to a disabled individual. Anyone can create a third party supplemental needs trust and there is no requirement to pay back Medicaid upon the beneficiary’s death. Instead, the grantor can choose who will ultimately inherit the assets at the disabled individual’s death.

A sole benefit trust is a type of supplemental needs trust that combines some aspects of a first and third party trust. A sole benefit trust using a third party’s assets to benefit a disabled individual under 65 years of age.  A sole benefit trust is often used so that the grantor can also qualify for Medicaid without a penalty period due to the transfer. Since there is no transfer penalty for the grantor, this type of trust requires actuarially sound distributions during the beneficiary’s lifetime and any remaining assets left to the beneficiary’s estate.  By having assets pass through the estate, Medicaid can seek recovery. Actuarially sound distributions are based on the life expectancy of the beneficiary.

As you can gather, the appropriate type of SNT depends on the circumstances. For beneficiaries receiving SSI, there are additional strict distribution guidelines. Use of trust assets to pay for food and shelter results in the 1/3 reduction of SSI benefit. Cash paid directly to the SSI beneficiary is countable income that reduces SSI benefits dollar for dollar – so cash is never given to an SNT beneficiary.

Due to the complexities, anyone planning to leave assets to a disabled individual should consult an estate planning attorney.  Likewise, your personal injury attorney and estate planning attorney should work together on any settlement for a disabled individual. Many times the need for government benefits is necessary for reasons not related to monetary support.

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Burner Law Group, P.C.

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