Last week, in the blog, we covered the reasons gifting a special needs child’s inheritance to their siblings is harmful. This week we approach another frequently asked question regarding Special Needs Planning: the laws surrounding Medicaid.

Question:

If I create a Special Needs Trust, does the money have to go to reimburse Medicaid when my child dies?

The answer to this is, no, if the funds used for the trust do not already belong to your child. If a special needs trust has been created prior to the passing of the child, the money doesn’t necessarily go back to Medicaid when the child dies. However, the way you go about setting up your trust does matters. If the trust is established after your death, such as by a guardian or the court, any funds remaining in the trust at the time of your child’s death must be used to reimburse Medicaid for anything they have spent on your child’s care before it goes to other family members.

Why Create a Special Needs Trust?

Most special needs children rely upon Medicaid. If there is too much money left in their name (be it inheritance, award, personal injury case, etc.), they can and will become ineligible for many public benefits. That is where a Special Needs Trust can help. It allows you to provide for your child without impacting their Medicare eligibility, assuming it is set up correctly.

There are two different types of trusts to consider: First Party Trust or Third Party Trust:

• A First Party Trust is funded by the person with special needs–perhaps through inheritance, an award, or personal injury case, for example. This trust, which gives the child the legal right to inherit, is usually the only default when a parent or guardian doesn’t do any planning.

This is problematic because:

• The child is likely to become over-resourced and lose their benefits or
• The child, through a guardian, grandparent, or court, can establish a special needs trust, but that special needs trust must repay Medicaid at the child’s death.  See statute 42 USC 1396p(d)(4)(a) Trust.

What does the above information mean for you? It is much better for the parent or legal guardian to set up a third-party special needs trust ahead of time, than it is to rely on the statute itself.

• A Third Party Trust is funded by someone other than the individual with special needs, such as parents or other family members. Under the general trust, estate, and property law, the parent or guardian has full control over their own assets and can leave those assets subject to any restrictions they choose. This includes the ability to put strings or limitations on the trust that limit Medicaid’s ability to count the assets as belonging to the child.

As long as a Special Needs Trust has been established for the child prior to their death, the trust money can be directed wherever the parents (or legal guardian), would like it to go following the child’s death, including charities or siblings. 

Knowledge is Power!

Read more about the past, present, and future of Special Needs Planning and Medicaid at the National Academy of Elder Law.

To summarize, setting up a Third Party Trust for you and your special needs child will have innumerable benefits, and it should be done as soon as possible.

Morton Elder Law is here to help with this. Please contact us with any questions you may have; we will get you the answers you need!

 

~ Ronald Morton