First party special needs trust
Key takeaway
A first party special needs trust holds assets belonging to a person with a disability and must be established and used for that person’s sole benefit to qualify for the special needs trust exception.
Start with whose money will fund the trust. Then review the qualification requirements, the repayment provision and how payments will be made.
The exception has specific conditions
The federal exception concerns a trust containing the assets of an individual under age 65 who meets the SSI disability standard. It requires establishment for that individual’s benefit and Medicaid repayment terms described below.
For trusts established on or after the statutory change identified in Sources, permitted creators are the individual, a parent, grandparent, legal guardian or court. Earlier trusts require the establishment rules applicable to their creation.
This exception addresses specified Medicaid trust counting rules, and SSI expressly references it. It does not establish benefit eligibility by itself. SSA also requires review under its ordinary resource rules.
For a legally competent individual’s property, whoever establishes or funds the trust must have legal authority over those assets. Appointment as a representative payee does not necessarily provide that authority.
Medicaid repayment comes from remaining funds
At the beneficiary’s death, the trust must provide repayment from remaining funds to every state that provided Medicaid assistance, up to the total medical assistance paid on the beneficiary’s behalf.
SSA guidance requires those states to be the first payees, subject to permitted administrative expenses. Repayment cannot cover only selected states or only assistance provided after the trust was established.
If remaining funds cannot repay every state fully, the trust may provide proportional repayment. A restriction to assistance provided during the beneficiary’s lifetime may comply.
Before repayment, SSA permits taxes due from the trust because of the death and reasonable administration fees for terminating and wrapping up the trust.
SSA does not permit funeral expenses, debts to third parties, inheritance taxes for remainder beneficiaries or distributions to remainder beneficiaries before Medicaid repayment.
Trust payments need a separate SSI review
SSA treats cash paid directly to the beneficiary, including payments to a personal debit card, as unearned income in the month received or added to the card, subject to applicable income exclusions.
Direct payment of a beneficiary’s bill to a supplier is not itself income, but what the beneficiary receives must be evaluated separately.
A noncash item other than shelter is not income if it would be an excluded nonliquid resource when retained. Medical care and services paid directly to the provider by someone else are not income.
Shelter furnished or paid for by someone else is evaluated as in kind support and maintenance. Paying a vendor therefore does not assure that the beneficiary’s SSI amount will stay the same.
Two related terms
Third party special needs trust: Under SSA guidance, this trust uses assets belonging to someone other than the beneficiary or the beneficiary’s spouse. The name alone does not establish resource exclusion.
Pooled special needs trust: For the first party statutory exception, this is a trust established and managed by a nonprofit, with separate beneficiary accounts pooled for investment and management.
Common questions
Is naming it a Medicaid payback trust enough?
No. SSA requires specific operative repayment language consistent with its reimbursement requirements. A trust’s label or statutory citation cannot substitute for that language, and an oral trust cannot satisfy the requirement.
Can a court simply approve a trust that already exists?
No, not to satisfy SSA’s court establishment route. The court must establish the trust or order its creation before creation is completed. Other qualification requirements still apply.
The individual may petition for present establishment directly or through an agent.
Can a qualifying trust continue after the beneficiary turns 65?
Yes. Under SSA guidance, the exception can continue for a qualifying trust established before age 65, but later additions generally do not qualify and require separate income and resource analysis.
Trust earnings are not additions for this purpose. SSA also treats payments from an annuity, support obligation or Survivor Benefit Plan irrevocably assigned before age 65 like payments made before that age.
Sources
- 42 U.S.C. § 1396p(d)(4)(A): statutory special needs trust exception, including age, disability, establishment and repayment requirements.
- 42 U.S.C. § 1382b(e)(5): SSI’s reference to the statutory trust exceptions.
- SSA POMS SI 01120.203: sole benefit, establishment authority, court orders, Medicaid repayment, administrative expenses and additions after age 65. SSA explains the statutory change permitting individuals to establish their own qualifying special needs trusts. Before that change, the permitted creators were a parent, grandparent, legal guardian or court.
- SSA POMS SI 01120.200: third party funding and treatment of cash trust distributions.
- 20 C.F.R. § 416.1103: direct bill payments, excluded noncash items and medical care or services.
- 20 C.F.R. § 416.1130: shelter and in kind support and maintenance.