How a Supplemental Needs Trust Preserves Medicaid for a Disabled Heir

Families who include a child, a sibling, or a grandchild with a long-term disability come to my office with two goals that appear to work against each other. They want that person to receive a fair share of the estate, and they want the Medicaid coverage and Supplemental Security Income that pay for home care, day programs, medication, and housing supports to continue without interruption. New York law reconciles the two through a supplemental needs trust, a vehicle authorized by EPTL 7-1.12 and recognized by the Medicaid program for decades.

Why an outright inheritance ends the coverage

Medicaid for a disabled applicant is a needs-based program, so the agency looks at both income and countable resources, and the resource allowance for a single applicant is modest. A disabled heir who receives a check for eighty thousand dollars from an estate holds a countable resource the day it clears, and coverage stops. What follows is a spend-down: the money buys, at private rates, the same home care Medicaid had been covering, and when it runs out the family reapplies and waits out the processing time. The equal division the parents intended produces an unequal result, because the disabled child ends up paying for benefits the other children received at no cost. I have seen wills and trusts that divide an estate into equal thirds do exactly this, unfortunately.

The trust the parents create

The cleanest arrangement is a third-party supplemental needs trust, funded with the parents’ own assets and never with anything that belongs to the disabled person. It can be written into the will so that it comes into existence at death, or it can be created during life as a living trust, created now and funded later. The disabled child’s share then passes to the trust rather than to the child. Because the trustee holds sole and absolute discretion over distributions, and the beneficiary has no right to demand money from it, the principal is not an available resource and eligibility is preserved. There is also no obligation to reimburse Medicaid out of this kind of trust, since the money was never the disabled person’s to begin with. Whatever is left at the beneficiary’s death passes to the siblings, grandchildren, or charity the parents named.

When the money already belongs to the disabled person

A different set of rules applies when the assets are the disabled person’s own, such as a personal injury settlement, a retirement account paid out directly, or an inheritance already received outright. Those funds go into a first-party trust, and the requirements are stricter. The beneficiary must be certified disabled and under sixty-five, the trust must be established by the person, a parent, a grandparent, a legal guardian, or a court, and it must provide that the State is reimbursed at the beneficiary’s death for the Medicaid that was paid on their behalf. In the five boroughs these trusts are reviewed by the Supplemental Needs Trust Program of the city’s Human Resources Administration, which monitors expenditures, expects annual accountings, and recovers from the remaining principal up to the total amount of Medicaid spent. A beneficiary who is sixty-five or older ordinarily joins a pooled trust administered by a nonprofit instead. That is why I advise families not to wait for a lump sum to arrive before calling an attorney; the options narrow considerably once the money is in the beneficiary’s hands.

What the trustee can pay for

The word supplemental carries the weight here. The trust supplements what Medicaid provides and does not replace it. Cash handed directly to the beneficiary is treated as income and reduces the benefit, so a well-run trust pays vendors directly instead: dental and vision work, a computer, furniture, a phone plan, tuition, therapy that Medicaid will not authorize, travel to see family, a prepaid funeral. Payments toward food and shelter are handled more carefully, because they can reduce an SSI check, though there are situations where that trade is worth making. Choosing the right trustee matters as much as the drafting. A responsible sibling serving with a professional co-trustee is a common arrangement, particularly for a trust that may run for forty years and outlive everyone who set it up.

Making the rest of the plan agree with the trust

A trust protects only the assets that actually reach it. Retirement accounts, life insurance, and payable-on-death accounts pass by beneficiary designation, and as we discussed in a prior article, the form on file with the institution controls no matter what the will says. Those designations need to name the trust. Relatives should be told as well, so that a grandparent’s will leaves any gift to the trust rather than to the disabled person directly; one well-meaning bequest of twenty thousand dollars can undo years of planning. Where the beneficiary cannot manage funds or sign documents, an Article 81 guardianship may need to run alongside the trust. None of this is difficult to put in place during a parent’s lifetime, and it is considerably easier than repairing the problem through a court petition afterward.

If your loved one has a disability and stands to inherit assets which need to be protected, contact us today at (347) 766-2685 for a free phone consultation.

Contributed by Roman Aminov, Esq, a Queens estate attorney in New York City.