You wish to make provisions for a child or grandchild under the age of 65 who is disabled, dysfunctional and cannot manage their personal financial affairs. The child or grandchild either does or may in the future qualify for medicare or social security disability benefits. Your hope is that you can fashion your estate planning benefits without disqualifying your child or grandchild from receiving Medicaid of Social Security Disability benefits. A third party supplemental needs trust just might be the answer.

A third party supplemental needs trust is a written document which is prepared for the settlor, (creator for the trust) which holds, administers and distributes the parents or grandparents assets solely for the benefit of a child or grandchild without disqualifying them from Medicaid benefits. It is also designed so that the supplemental needs trust does not disqualify the child or grandchild from qualifying for social security disability benefits.

The fundamental idea behind a third party supplement needs trust is the assets are from a third party, managed by a third party and do not become assets or constructively owned asset of the child or grandchild because they are and never were assets of child or grandchild. Hence, the assets are not considered in qualifying for Medicaid or Social Security Disability benefits.

In order to accomplish these goals the trust needs to meet numerous requirements, which are as follows;

1. The beneficiary must be under the age of 65 years of age;

2. The assets going into the trust must be those of a third party and the trust must
not be authorized to or receive assets from the child or grandchild;

3. The trust must be irrevocable;

4. The trust must be funded (it could be funded with a small amount of money
and added to at a later date, for example from your or your spouse’s estate);

5. The trust must limit distributions to special needs (i.e. education or recreational expenses, therapy, medical services not covered by medicare, telephone bills, entertainment etc.) and not be distributed for support, i.e. food, necessary clothing or shelter. Essentially, the trust cannot provide for the daily support of the child or grandchild.

6. The maker of the trust must not owe a duty of support to the child or grandchild (If a child has reached majority the parent no longer owes the child a duty of support); and

7. The child or grandchild cannot force distribution; cannot change the terms of the trust; or determine who gets the residuary benefits of the trust after its purpose has been achieved.

In managing the trust, the trustee must be careful to not make distributions which would cause the distribution to be treated as income. For example, cash paid directly from the trust to the child or grandchild would be considered unearned income. Food or shelter received by the beneficiary as a result of disbursement from the trust by the trustee to a third party are considered income in the form of in kind support. Examples of disbursements which are not income include for example, a computer which would be household goods, a ski pass which would be considered entertainment, telephone bills which are not considered a residential utility, a membership at the swimming pool or health club which would be considered recreation or therapy.

Needless to say a Third Party Supplemental Needs Trust is a complex document, which needs to be prepared by an attorney familiar with the regulations and requirements of both social security disability and medicaid. However it provides a beneficiary an opportunity to simultaneously enjoy the supplemental benefits coming from the trust, which improves his or her quality of life; while at the same time enjoying the benefits of support and medical care from medicaid and/or social security disability. However, with any estate planning endeavor you must consider your and the beneficiary’s situation and your desires and objectives.

Vance E. Halvorson
Attorney at Law
© 2016
Third Party Supplemental Needs Trust 9-23-2016 – VEH2013 STIC