People with disabilities are likely to need very expensive medical care throughout their lives. While many Americans get health insurance through their employers, people with special needs are not in a position to work, thereby denying them this benefit.

Fortunately, a solution exists in the form of Medicaid. This is a jointly administered federal/state government health insurance program. Many people who qualify for Medicaid also receive modest monthly benefits through another program called Supplemental Security Income (“SSI”).

You cannot qualify for these programs unless your resources are quite limited. Even if you qualify, eligibility is not necessarily permanent. A significant change in financial status could trigger a forfeiture of benefit eligibility.

First Party or Self-Settled Supplemental Needs Trusts

Sometimes a person with a disability who is relying on Medicaid or SSI benefits will receive a personal injury settlement or judgment. This is just one of the ways a benefit recipient could come into money. There are other possibilities.

If a person dependent upon Medicaid or SSI for medical care were to receive a personal injury settlement or judgment, the proceeds would disqualify that person for benefits unless timely actin is taken. The proceeds could be used to establish a first-party or self-settled supplemental needs trust, sometimes referred to as a special needs trust (SNT).

The person establishing and funding a special needs trust is called the grantor or settlor. The beneficiary of the trust is the person who will receive distributions. In this example, the grantor will also be the beneficiary, which is why this is called a “self-settled” trust.

When the trust is established, the grantor identifies a third-party trustee to act as the administrator. From a legal perspective, any adult willing to assume the role can serve as trustee. Another option would be to use a professional fiduciary. Trust companies and the trust departments of banks provide trustee services. Naming a professional entity as the trustee is often the better choice because of the myriad of rules that apply to SNTs.

Medicaid does not cover every medical, dental, and therapeutic treatment that a beneficiary may want or need. The Supplemental Security Income payouts are extremely modest, so no one could live well on this benefit alone. That is where the SNT comes into play.

The grantor/beneficiary could not reach the assets in the trust directly, but the trustee could use the trust resources to keep the beneficiary comfortable and ensure his or her quality of life.

As long as everything is done correctly, ongoing eligibility for government benefits would not be adversely affected.

Third-Party Special Needs Trusts and Medicaid Recovery

If you want to leave an inheritance to someone with a disability who is relying on Medicaid or SSI benefits, the better way to go is to establish a third-party trust. Everything is the same as with the SNT with regard to the trustee’s ability to make discretionary distributions to provide goods and services for the benefit of the beneficiary.

There is one big difference between these two types of trusts. When a Medicaid beneficiary passes, the government must seek reimbursement from the deceased individual’s estate. Since there is a low asset limit, there is usually nothing for them to take.

This changes if a first-party special needs trust has been established. Medicaid can and will attach whatever remain in a first-party trust. The government cannot, however, go after the assets in a third- party supplemental needs trust.

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