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Funds held in a properly drafted special needs trust (SNT) will not affect a Supplemental Security Income (SSI) or Medicaid recipient’s benefits. However, funds disbursed in a manner that violates SSI or Medicaid rules can impact these benefits. It is important to understand what an SNT can and cannot pay for in order to avoid this.

What Is an SNT?

Special needs trusts (also known as “supplemental needs trusts”) are an important component of planning for a disabled person. An SNT can play an important role in preserving the financial security and lifestyle of a person with special needs. It allows the individual to benefit from supplemental resources while still qualifying for public benefits, such as SSI and Medicaid.

There are several categories of SNTs, including first-party SNTs, third-party SNTs, or pooled trusts. Depending on your circumstances, one of these may be more suitable for you or your loved one. For example, the age of the beneficiary, the individual or entity that is funding the trust, and other factors can dictate which type of SNT is best for your situation.

Special Needs Trust Rules: Permissible Uses of SNT Funds

In general, SNT money or funds should not be used to pay for food or shelter because this is what SSI is intended to be used for. An SNT is meant to supplement, and not replace, SSI.

The first general rule when considering whether the use of SNT funds is permissible is to ask if the funds will be used for the sole benefit of the disabled beneficiary. Disbursements must primarily and directly benefit the beneficiary and only indirectly benefit others. So, for example, if a beneficiary needs to travel somewhere and needs an aide to accompany him or her, an SNT may pay for both of their travel costs.

Some examples of allowed uses of SNT funds are the following expenditures made on behalf of the beneficiary:

• Activities
• Entertainment
• Books, newspapers, and magazines
• TV, internet, and phone
• Education or training
• Insurance, subject to certain limitations
• Therapies not covered by Medicaid
• Medical equipment or services not covered by Medicaid
• Services rendered to the beneficiary by professionals
• Electronics, computers, and software
• Transportation/travel costs
• Vehicle and maintenance or operation costs
• Household items
• Personal items
• Taxes
• Care management

Whenever possible, an SNT should purchase an item in the name of the trust and not the beneficiary. This is because, in some scenarios, if a beneficiary receives an asset as the result of a permissible expenditure, it could be considered income to the beneficiary or an available resource. This may disqualify them from benefits.

Where it is not possible for an SNT to directly purchase an item or service, the purchase should be billed to the SNT. For example, when a beneficiary purchases fuel for their car, they could do so with a gas credit card billed to the SNT.

What Special Needs Trusts Should Not Pay For

In general, an SNT should not give the beneficiary money (cash or cash equivalent) from the SNT to make purchases on their own. Instead, an SNT trustee should pay for items directly to the vendor or provider. The SNT beneficiary can be provided with a prepaid credit card for them to use as cash for miscellaneous items. The SNT trustee determines the balance that would be put on the card and the SNT trustee, and if appropriate the beneficiary, chooses the categories of vendors to which the beneficiary will have access.

If an SSI beneficiary receives money from an SNT, their benefit can be reduced by $1 for each dollar received, up until the point that they lose SSI completely. This is a hard-and-fast rule and should be disregarded only after a serious conversation with a special needs professional.

In addition, a SNT should not pay for food or shelter if possible. If an SNT pays for a beneficiary’s food or shelter directly to a landlord, restaurant, or store, the beneficiary could lose up to one-third of their SSI benefit.

Paying bills for housing-related expenses like mortgage payments, real estate taxes, utilities, and condo fees are considered payments for housing that can also cause a similar reduction in benefits. A one-third decrease in benefits might be a small price to pay for guaranteed shelter and meals. But if the beneficiary works or receives other income, the additional one-third reduction could cause the beneficiary to lose SSI and accompanying Medicaid benefits entirely.

As with anything, there are exceptions to this guidance. In some situations, the benefit to a beneficiary of paying for these items outweighs the impact of potentially losing government benefits. Because each SNT and the situation of its beneficiary is unique, it is crucial to speak with a professional when considering making disbursements that could lead to a loss of benefits.

Get Help With Your Plan

Once you have taken cash, housing, food, and any services covered by Medicaid, off the table, an SNT can typically pay for most other things a beneficiary might need to supplement their lifestyle. The rules regarding an SNT can be complicated, so it is best to speak with the Special Needs Planning Attorneys at Kommer Bave & Ciccone LLP to discuss what may be done with SNT funds before making any payments to anyone. This is a cost that, under most circumstances, can be paid for by the SNT, and the advice you receive may safeguard a loved one’s benefits.

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Trying an alternative to guardianship can be important for several reasons. First, it prevents a court from ruling that someone is “incapacitated,” which carries with it a stigma and can be hard to undo. Second, it puts the person in the driver’s seat. Third, it is much less expensive and time-consuming. There are less restrictive options, such as supported decision-making, power of attorney, or revocable trusts that could be a better fit.

What Is Guardianship?

Every adult is assumed to be capable of making his or her own decisions unless a court determines otherwise. If an adult becomes incapable of managing their person or property, the court may appoint a guardian. The standard under which a person is deemed to require a guardian differs from state to state. The standard in New York is a high standard of clear and convincing evidence.

Guardianship is a legal relationship between a competent adult (the “guardian”) and a person who because of incapacity is no longer able to take care of his or her own affairs (the “ward”). The guardian can be authorized to make legal, financial, and health care decisions for the ward. Depending on the terms of the guardianship and state practices, the guardian may or may not have to seek court approval for various decisions.

Alternatives to Guardianship

Because guardianship results in the loss of an individual’s legal capacity, it involves a profound loss of freedom and dignity. Therefore, state laws require that guardianship be imposed only when less restrictive alternatives have been tried and proven to be ineffective. Less restrictive alternatives that should be considered before pursuing guardianship include:

• Power of Attorney. A power of attorney is the grant of legal rights and powers by a person (the principal) to another (the agent or attorney-in-fact). The attorney-in-fact, in effect, stands in the shoes of the principal and acts for him or her on financial, business or other matters. In most cases, even when the power of attorney is immediately effective, the principal does not intend for it to be used unless and until he or she becomes incapacitated.
• Representative or Protective Payee. This is a person appointed to manage Social Security, Veterans’ Administration, Railroad Retirement, welfare or other state or federal benefits or entitlement program payments on behalf of an individual.
• Revocable Trust. A revocable or “living” trust can be set up to hold an older person’s assets, with a relative, friend or financial institution serving as trustee. Alternatively, the older person can be a co-trustee of the trust with another individual who will take over the duties of trustee should the older person become incapacitated.
• Supported Decision Making. If a person can execute estate planning documents, they can also sign a durable power of attorney and a health care proxy, which allows someone to assist them with decisions without court involvement. “Supported decision making” is a growing alternative to guardianship in which trusted advisors like family, friends or professionals assist in making decisions, although the individual retains the ultimate right to make their own decisions.

For more information on alternatives to guardianship, such as establishing a power of attorney, revocable trust, or supported decision making, contact the Elder Law Attorneys at Kommer Bave & Ciccone LLP.

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