A primary planning tool for a person with a disability is a carefully drafted trust that prevents the assets of the trust from disqualifying the person from receiving public benefits.
1. Is a Trust Necessary?
A trust can be a beneficial planning tool to preserve assets for the benefit of a person with a disability. If an individual’s only public benefits are entitlement programs such as Social Security Disability Insurance and Medicare, a trust may not be necessary. If, however, a person with a disability is receiving need-based benefits such as SSI or Medi-Cal or may reasonably be expected to need such programs in the future, a trust is the primary means to preserve the public benefits and allow for additional assets to be held and used for the individual’s future needs. Otherwise, the individual may become ineligible for public benefits until the additional assets are spent or given away (which would also cause a period of ineligibility). Other than placing assets in a trust, the other alternative is to purchase assets that are not counted for purposes of need-based benefit requirements. However, this does not provide additional funds to supplement public benefits. In addition, if funds are needed and the exempt assets are sold, the proceeds could again trigger benefit ineligibility until spent.
2. Trusts For People With Disabilities.
Trusts for people with disabilities fall into two basic categories: (1) first party trusts; and (2) third party trusts. Although within each category there are variations, the basic structure is that assets are transferred into trust for the benefit of a beneficiary with a disability. A third party serves as trustee and the beneficiary has no control over disbursements from the trust. The distinction between a first party trust and a third party trust is where the assets to fund the trust originate.
A. The first party trust is a trust that allows a person with a disability to transfer his or her own assets into the trust without being penalized under need-based public benefit programs. The most prominent feature of this type of trust is the requirement that the State be reimbursed from the trust’s remaining assets on the beneficiary’s death. The State must “receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan.” The reimbursement requirement applies only to Medi-Cal benefits paid, not to SSI benefits.
B. A third party trust is established with the assets of someone other than the person with a disability. Unlike the first party trust, there is no reimbursement requirement. The third party trust also has the advantages of allowing the person setting up the trust (the “settlor”) a great deal of flexibility in structuring the trust including:
- Providing for distributions to or for the benefit of multiple beneficiaries, including beneficiaries without disabilities;
- Establishing an advisory committee to oversee and make recommendations regarding the care of the beneficiary with a disability;
- The ability to use trust funds to hire caregivers, case managers, advocates and attorneys for the beneficiary with a disability; and
- Controlling the final distribution of any assets remaining after the death of the beneficiary with a disability.
The key to a third party trust is ensuring that the trust assets are not includible as assets or income of the beneficiary. A carefully drafted third party trust can allow a parent or relative to provide for the lifetime care and advocacy of a person with a disability without causing him or her to lose public benefits.
3. What kinds of benefits can be provided by a third party trust for a beneficiary with a disability?
The trustee is generally directed to make expenditures to maintain the beneficiary’s good health, safety, and welfare when these are not being provided by any public agency. This commonly includes basic living needs such as dental care, medical care, custodial care, support services, and similar care not provided by public benefit programs. In addition, distributions are also commonly authorized for goods and services such as:
- Clothing, bedding, and furniture;
- Telephone, Internet, and cable or satellite television;
- Audio, video and computer equipment;
- Newer or more effective medications than allowed by Medi-Cal;
- More sophisticated medical or dental or diagnostic work or treatment for which funds are not otherwise available;
- “Nonessential” medical procedures (such as massage therapy or acupuncture);
- Periodic outings and vacations; and
- Any other items to enhance the beneficiary’s quality of life, self-esteem, or situation. If set up correctly, a trust can provide additional comfort and care to enhance the quality of life of a person with a disability, without causing a loss of public benefits.
If you would like further information about a trust for a person with a disability, please contact us at (916) 441-2430.