Enhancing Lives Through a Third-Party Special Needs Trust
A Special Needs Trust (SNT) enables someone to support a disabled beneficiary without affecting their eligibility for government assistance programs like Supplemental Security Income (SSI) and Medicaid. These trusts provide funding for expenses that are not covered by such programs, offering the beneficiary access to additional goods, services, and experiences that enhance their quality of life.
However, SNTs have strict rules, and any misuse of funds by a trustee could result in penalties or a reduction in government benefits for the beneficiary.
Understanding SNTs: First-Party vs. Third-Party
There are two primary types of Special Needs Trusts: first-party and third-party. The main distinction is that a first-party SNT holds funds that belong to or are received by the beneficiary (such as from an inheritance or settlement), while a third-party SNT holds funds provided by a family member (such as a parent or grandparent).
Both types of SNTs can hold various assets, including cash, investments, life insurance policies, retirement accounts, and real estate. The key difference between the two is that when a beneficiary of a third-party SNT passes away, the remaining funds are not required to be used to reimburse the state for any government benefits the beneficiary received during their lifetime. Since the funds in a third-party SNT are not considered to belong to the beneficiary, any leftover assets can be passed on to other family members or charitable organizations.
What Can and Can’t a Third-Party SNT Pay For?
Both first-party and third-party SNTs must follow certain guidelines regarding what they can and cannot fund, to ensure continued eligibility for government benefits.
The main rule is that SNTs are intended to supplement government assistance—not replace it. This means that SNT funds should cover “special needs” but not basic living expenses, like housing or medical care, which are typically covered by programs like SSI and Medicaid.
Some examples of what an SNT can cover:
- Everyday expenses not covered by SSI or Medicaid (such as clothing, entertainment, and personal items)
- Services and goods that benefit the disabled beneficiary directly, such as specialized equipment or support aides during travel
Key restrictions:
- Payments should be made directly to vendors, not to the beneficiary, to avoid any complications with government benefit eligibility.
- Distributions that benefit others indirectly (such as a travel aide) are acceptable, but funds should not be used to pay for ineligible items like rent, mortgage, or utility bills that could affect SSI benefits.
SSI, Medicaid, and SNTs: What to Know
SSI considers any shelter costs provided by someone else, including an SNT, as "in-kind support and maintenance" (ISM). This is treated as unearned income, which could reduce or disqualify SSI benefits. Therefore, certain expenses, such as rent or mortgage payments, property taxes, or utilities, should not be paid using SNT funds.
However, Medicaid rules vary by state, and SNTs can often be used for medical and dental expenses that Medicaid doesn’t cover, such as:
- Specialized psychiatric services
- Over-the-counter medications
- Elective surgeries
- Dental and vision care
- Hearing aids
- Private rooms in healthcare facilities
Improper distributions from an SNT can lead to a reduction in SSI benefits, loss of Medicaid eligibility, or both. For instance, if SNT funds are used for ineligible purchases, SSI benefits may be reduced by up to one-third, and direct cash distributions to the beneficiary could disqualify them from SSI altogether.
Allowed SNT Purchases
Despite restrictions, third-party SNTs can be used for a wide range of items and activities that improve the beneficiary’s quality of life. Some common examples include:
- Clothing and personal items
- Communications services (phone, internet, cable)
- Transportation (vehicles, insurance, maintenance, fuel)
- Education (tuition, books, tutoring)
- Recreation (travel, entertainment, hobbies)
- Home furnishings (furniture, electronics, household items)
- Health and wellness (alternative therapies, fitness equipment)
- Pets and pet care
- Cultural and religious activities (festivals, ceremonies)
- Administrative costs (attorney fees, accounting)
Creative Uses for Third-Party SNT Funds
Trustees have considerable flexibility in using SNT funds to enhance the beneficiary’s life, as long as the rules are followed. Some creative uses of SNT funds include:
- Vacations: Airfare, accommodations, cruises, and other travel-related expenses.
- Entertainment and hobbies: Concerts, movies, art supplies, musical instruments, and more.
- Sports and recreation: Memberships, lessons, and camp fees for activities such as sports or outdoor adventures.
- Adaptive equipment: Items like adaptive bikes, all-terrain wheelchairs, or modified vehicles.
- Technology: Laptops, tablets, smartphones, and related services to stay connected.
- Wellness treatments: Aromatherapy, reiki, yoga, massage therapy, and other non-traditional treatments.
- Pets: Adoption, veterinary care, food, grooming, and training for a pet.
- Skills development: Educational programs or workshops to build skills and self-confidence.
- Home entertainment: Electronics, furniture, and décor to make the home more comfortable and enjoyable.
Getting Help with SNT Administration
Special Needs Trusts are complex and come with legal responsibilities. Mismanaging an SNT can lead to the loss of vital government benefits, so it’s important to carefully follow all applicable laws and rules when making distributions.
Trustees must always balance immediate desires with long-term financial goals, particularly if the beneficiary relies on Medicaid for long-term care. Trustees also have legal duties to comply with trust law, which could result in legal consequences if mishandled.
Our estate planning attorneys can assist with setting up and managing an SNT for your loved one, either as a trustee, co-trustee, or in an advisory role. Contact us to schedule a consultation and learn more about how we can help.