What can the trust pay for?
It supplements benefits rather than replacing them. Typically that means things the programs do not cover: education, travel, electronics, recreation, therapies not covered by Medicaid, a vehicle, personal care attendants beyond what is funded, and other quality-of-life items.
The trustee controls distributions. Direct cash to the beneficiary generally is not permitted, because cash counts as income and can reduce benefits — which is precisely what the structure exists to avoid.
Two kinds, and the difference matters
Third-party trusts are funded with someone else’s money — most commonly a parent or grandparent leaving an inheritance. There is no Medicaid payback requirement on the beneficiary’s death; whatever remains goes to whoever you named. This is the version created as part of an estate plan, and it is the better structure whenever it is available.
First-party trusts are funded with the beneficiary’s own assets — a personal injury settlement, an inheritance received outright, or accumulated savings. These carry a Medicaid payback: on the beneficiary’s death the state is reimbursed from what remains before anything passes to family. There are eligibility conditions on establishing one.
Pooled trusts are managed by a nonprofit that maintains a common fund with separate sub-accounts, and can be an option where the amount is modest or no suitable trustee exists.
The mistake to avoid
If you have a family member receiving needs-based benefits, check what your will and your beneficiary designations say right now. An estate plan drafted before a diagnosis, or one that leaves everything equally to the children without thinking about it, can do real harm.
The same applies to grandparents and other relatives. A generous bequest from an aunt who was never told can undo careful planning. Families that have done this well have usually had one conversation with everyone likely to leave the beneficiary money.
Frequently asked questions
What is a supplemental needs trust?
A trust holding assets for a person with a disability so those assets do not count against needs-based benefits like Medicaid and SSI. It pays for goods and services the programs do not cover.
Will an inheritance affect my child’s benefits?
An outright inheritance can disqualify them by pushing them over the asset limit. Directing the inheritance into a properly drafted trust avoids that.
What is the difference between a first-party and a third-party trust?
A third-party trust is funded with someone else’s assets and has no Medicaid payback. A first-party trust is funded with the beneficiary’s own assets and requires the state to be reimbursed on their death.
Can the beneficiary receive cash from the trust?
Generally not directly. Cash is treated as income and can reduce benefits. The trustee pays for goods and services instead.
Who should be trustee?
Someone who will manage funds carefully and understand the benefit rules, or a professional trustee. Distributions made without regard to the rules can cost the beneficiary their eligibility.
Related: Estate Planning Advisory · Wills · Powers of Attorney · back to Estate Planning
Written by Dale Riedel, Esq. · Admitted in New York, Bar No. 5837539