Funding A Special Needs Trust With Excess “Spend-Down” Money

To be eligible for Medicaid, an individual must meet financial standards. Many Medicaid applicants will have to spend some of their assets in order to meet the financial threshold. There are a few excludable resources that are exempt from Medicaid spend-down, including an individual's personal possessions, a prepaid irrevocable funeral trust, and a special needs trust for a disabled child. These assets can be retained by the Medicaid applicant and will not impede Medicaid eligibility.  

When a Medicaid applicant has a disabled child, a special needs trust allows the transfer of assets from a parent to the child without jeopardizing the child’s government benefits. Explore with Senior Planning Services how you can utilize excess “spend-down” money to fund a special needs trust if you are concerned about providing for a disabled child while on Medicaid. 

Key Takeaways on Special Needs Trusts for Medicaid

• A special needs trust for disabled adults is a legal arrangement that holds and manages assets so the funds can support their quality of life without affecting eligibility for government benefits.

• A special needs trust can be used to place excess assets into a protected trust, allowing individuals to meet Medicaid asset limits while preserving funds for the beneficiary’s future needs.

• Setting up a special needs trust involves working with an attorney to draft the trust document, appoint a trustee, and transfer assets into the trust so they can be managed in accordance with its terms.

What Is a Special Needs Trust? 

A special needs trust (SNT) is a legal arrangement that holds money or property for a person with a disability without affecting their eligibility for government benefits like Supplemental Security Income (SSI) and Medicaid. Special needs trusts are also referred to as “supplemental care trusts” because they supplement the disabled child’s Supplemental Security Income and Medicaid benefits.

Special needs trusts spending rules mean that the funds in a special needs trust may be used only for certain items or services. The trust is meant to supplement, not pay for, basic necessities such as food and shelter. Some things that may be purchased through a special needs trust include:

• Home modifications to assist the disabled
• Medical treatments and equipment not already covered by government assistance programs.
• Education and recreation equipment
• Computers
• Musical instruments
• Sports equipment
• Travel expenses
• Prepaid funeral

How Does a Special Needs Trust Work?

When a parent creates a special needs trust for a disabled child, he/ she chooses a trustee. A trustee is an individual or institution that manages the assets in the trust. The trustee’s responsibility is to follow the terms and guidelines outlined in the trust, as well as to transfer the funds from the trust to the beneficiary or disabled child. A trustee can be a family member, an attorney, a bank, or anyone that one chooses to assign as a trustee.

Utilizing a Special Needs Trust for Medicaid

The special needs trust restricts the beneficiary (or disabled child) and the parents' access to the trust's assets. Since only the trustee has access to the funds, it’s considered an unattainable asset for both the parent and the disabled child. This ensures that a Medicaid applicant who transfers assets to a special needs trust for a child during the look-back period will not incur a Medicaid penalty. Additionally, the recipient’s government benefits will not be jeopardized. When established and administered correctly with professional guidance, a special needs trust offers a practical strategy for managing resources while maintaining long-term stability and support.

How to Set Up a Special Needs Trust

Setting up a special needs trust begins by working with an attorney who specializes in estate planning or disability law to determine the appropriate trust type. The attorney drafts a legal trust document that names the beneficiary, appoints a trustee to manage the assets, and outlines how the funds may be used without affecting eligibility for public benefits. Once the document is signed and finalized, the trust is funded by transferring money or other assets into the special needs trust account. The trustee then manages and distributes the funds in accordance with the trust’s terms for the beneficiary’s benefit.

Who Is Eligible for a Special Needs Trust?

A special needs trust is designed for individuals with physical, intellectual, or developmental disabilities who rely on means-tested government benefits such as Supplemental Security Income (SSI) or Medicaid. It is established for someone whose condition significantly limits their ability to support themselves financially and who needs ongoing assistance to maintain eligibility for public benefits while receiving additional financial support.

Support for Special Needs Trusts at Senior Planning Services

Using a special needs trust can be an effective way to preserve excess spend-down funds while protecting your Medicaid eligibility. If you are applying to Medicaid and wondering about effective ways of utilizing extra “spend down funds”, reach out to Senior Planning Services. We can explain which spend-down options you are eligible for and determine whether a special needs trust could be an option for you. 

FAQs on Special Needs Trusts

Disclaimer: The information below is for educational purposes. Please consult an attorney for up-to-date rules.

What can a special needs trust not pay for?                  

A special needs trust cannot pay for basic support expenses that government benefits already cover. These restricted expenses include rent, mortgage payments, property taxes, groceries, and direct cash to the beneficiary. 

Can a special needs trust own a house?           

A special needs trust can own a house for the beneficiary. Trustees often purchase or hold a home to provide stable housing without giving the asset directly to the beneficiary. 

What are the disadvantages of a special needs trust?        

The disadvantages of a special needs trust include high setup costs, strict spending rules, and complex administration. First-party trusts also require Medicaid repayment upon the beneficiary's death.

Is a special needs trust revocable or irrevocable?

A special needs trust is usually irrevocable. Irrevocable status protects government benefit eligibility by removing the assets from the beneficiary’s direct control.