The Basics of Managing a Supplemental Needs Trust

By Colin B. May, Esquire
Estate Planning Attorney

There are many public programs available in Pennsylvania to provide benefits to a loved one with special needs. While understanding the strict guidelines and rules of these programs can be a daunting task, many of these challenges can be overcome with proper accounting, tax, and estate guidance and planning. The area of estate planning provides a number of useful solutions for this purpose, and one particular tool is known as a “Supplemental Needs Trust.”  

What is a Supplemental Needs Trust?

A Supplemental Needs Trust (sometimes referred to as a “Special Needs Trust”) is designed to improve the quality of life for a loved one in a way so as not to disqualify that person from the public benefits to which they are entitled. At our firm, we prefer to use the term “supplemental needs” versus “special needs” because this term better describes the function and role of the trust. A key function of the trust is to ensure that trust property is used to supplement, but not supplant, the benefits being provided by public programs. In fact, this idea of “supplementing rather than supplanting” is a common theme you will see throughout this article.

A Supplemental Needs Trust can come in many varieties – revocable versus irrevocable, grantor versus non-grantor, testamentary versus inter-vivos, self-settled versus third-party – but we do not need to delve into these distinctions at this time as the concepts discussed in this article will generally apply to all types. The goal of this article is to provide issues a trustee should consider in managing a trust for a supplemental needs beneficiary.

To start, we need to understand the public benefit programs that a beneficiary will likely qualify for and how to administer the trust so as to maintain those benefits. 

Benefit Programs: SSI, SSDI, Medicare & Medicaid

The four main public benefit programs mandated by federal law are Supplemental Security Income or “SSI,” Social Security Disability Insurance or “SSDI,” Medicare, and Medicaid. It is important to distinguish between the two cash benefit programs, SSI and SSDI, by establishing that SSDI is an entitlement program that is not “means-tested,” meaning that a person qualified to receive SSDI is not required to fall below a specific asset or income test in order to qualify. Similarly, Medicare is also not based on the recipient’s assets and income (those who qualify for SSDI will qualify for Medicare after 24 months of SSDI eligibility), whereas under Medicaid a person’s eligibility for SSI will be a determining factor.

On the surface, a beneficiary who is disabled and receiving benefits through SSDI and Medicare may not seem as strong a candidate for a Supplemental Needs Trust. However, it is not uncommon for a beneficiary receiving SSDI and Medicare to also receive housing subsidies and other public state-level programs, some benefits through SSI and Medicaid, or to later require assistance under programs like SSI or Medicaid in the future. Whether a Supplemental Needs Trust is warranted will depend on each beneficiary’s unique circumstances.

Nonetheless, the public benefits program we will emphasize here is Supplemental Security Income, or SSI, as the eligibility restrictions are the most pronounced and other public programs will base eligibility on qualifying for SSI.

Determining SSI Eligibility

Assuming a beneficiary fits the criteria for being “disabled,” there are a number of financial factors used in determining eligibility, though the main ones are: (1) Income; (2) Assets; and (3) Deeming.

(1)          Income: A beneficiary must have limited income and assets to be eligible for SSI. The rules are fairly simple in determining the distinction between income and assets: money received in a given month is considered “income” for that month, and any portion remaining on the first day of the next month is considered an “asset.” There are different rules that apply with respect to income types, but we will not be exploring those in this article. In general, an SSI recipient is entitled to receive a small amount of income in any month – $20 – without a reduction in benefits (the SSI “disregard” amount.) One distinction between income types is that “earned” income will reduce benefits, after the $20 disregard, by a factor of $1 for every $2 earned, whereas “unearned” income will reduce the benefit by $1 for every $1 earned (a “dollar for dollar” reduction). Important to a trustee, unearned income includes investment income as well as money gifted to the beneficiary.

Another factor that may reduce the SSI monthly benefit is “in-kind support and maintenance” (or “ISM”) meaning payment from a third-party (including a trust) for items considered food and shelter. A receipt of ISM – again, direct payment for food or shelter – will reduce the SSI benefit by the lesser of the presumed maximum value of the items provided or a value determined by dividing the maximum SSI benefit ($771 for 2019) by 3 and adding the $20 disregard (for a total of $277). Direct purchases for items other than food and shelter will not be considered ISM so long as they cannot be converted to food or shelter.

(2)          Assets: The asset test for SSI is less complicated than the income test. A single person must have less than $2,000 in available resources in order to qualify. These do not include the beneficiary’s home, one automobile, household furnishings, prepaid burial amounts, tools of the beneficiary’s trade or business, $1,500 for funeral expenses, and other items. However, do not be fooled by the seeming simplicity of these rules as they can often be more complex than anticipated. As is always the case, you should consult with a qualified professional.

(3)          Deeming: This factor will only apply if the beneficiary is a minor under the age of 18. In this case, SSI will also consider the income and assets of parents who are not themselves disabled and ineligible for SSI. However, as this article focuses on adult beneficiaries, these complex considerations are not explored here. 

The Link Between SSI and Medicaid

In Pennsylvania, an SSI recipient is automatically eligible to receive Medicaid benefits. Conversely, if a beneficiary fails to financially qualify for SSI they may also lose eligibility for Medicaid. Accordingly, a trustee should be sensitive to making distributions that create disqualification for SSI.

This can be a particularly sensitive issue when a beneficiary is receiving both SSDI and SSI benefits as the SSI benefit in this case is much smaller than the typical benefit for a beneficiary receiving benefits solely through SSI.  

Direct Cash Payments: Tread Lightly

As the SSI benefit is fairly modest (maximum of $771) and can have implications for other key benefits, we see that large cash payments (anything over the $20 disregard) will result in a dollar for dollar reduction in SSI. In general, most Trustees would be wise to limit or avoid such payments to a beneficiary. Similarly, items that can readily be converted into cash should be carefully scrutinized as these may be deemed a cash payment to the beneficiary.

What about Food and Shelter?

While we know that providing a direct cash payment is something to generally limit or avoid, the rules regarding provision of food and shelter or “in kind support and maintenance” (ISM) results in a reduction in benefits that may be less by comparison. While the idea of “food and shelter” may seem straightforward, the Social Security Administration expands the colloquial definition to mean:

1.    Food;

2.    Mortgage (including property insurance);

3.    Real property taxes;

4.    Rent;

5.    Heating Fuel;

6.    Gas;

7.    Electricity;

8.    Water;

9.    Sewage; and

10. Garbage removal.

Providing goods and services in these categories will reduce the beneficiary’s SSI entitlement, but importantly, at a lower rate than paying cash to the beneficiary directly. For some trustees, providing support in the form of food and shelter may be an appropriate strategy so long as they pay close attention to the implications of doing so.

Things A Trustee Can Provide

The items provided below are generally acceptable and will not affect SSI eligibility, but trustees do want to be sure to limit or avoid giving cash directly to the beneficiary to pay for these items as this will reduce the SSI benefit dollar for dollar:  

Clothing: As of March 7, 2005, clothing is no longer considered ISM and a Trustee may purchase clothing for the beneficiary, whether it is clothing tailored to accommodate a specific disability or clothing for day-to-day use.

Phone, Cable, and Internet: While most people would consider these “utilities” related to housing, there is no specific federal limitation that exists with regard to these services.

Vehicle, Car Insurance, Maintenance and Fuel: The purchase of one automobile, related maintenance, and gas is permitted under federal law. The SSI program and Pennsylvania Medicaid do not currently apply a value limitation for the type of vehicle provided.

Tuition, Books, and Tutoring: There is no state or federal limit that applies to these goods and services.

Travel and Entertainment: Having a trustee pay for local events such as concerts, movies, sporting events, plays, and other events is generally acceptable. While travel is generally an acceptable use, a trustee may need to be careful with regard to travel expenses including: hotel stays (food and shelter expenses), paying for travel companions, airline tickets to foreign destinations that may be convertible to cash if refunded, and travelling out of the country for more than one month (as the beneficiary may lose SSI and Medicaid for that month.)

Household Furnishings: there is no federal or state limitation in place.

Electronic Devices: Things like television, computers, and other electronics are not subject to federal or state limitations, though a trustee must be cognizant to avoid any items that are kept as valuable collectibles and are not used for ordinary household use.  

Durable Medical Equipment: No federal or state limitation currently applies to these items.

Care Management: There is no strict federal limitation here, but a trustee should be sensitive to payments to family members who provide care.  

Therapy and Medications: No federal or state limitation currently applies to these items.

Legal and Trustee Fees: The amount paid to retain legal advice as well as paying for costs the trustee incurs for administering the trust are allowed under federal and state law.

Other Tools and Resources

Recognizing that these rules can be complex, a well-crafted Supplemental Needs Trust will permit the trustee to enlist the assistance of a knowledgeable professional in the ongoing administration of a special needs trust. This person is may be referred to as a “Care Manager” and may offer advice and assistance to the trustee in determining how and what trust assets can be used for.

Another powerful tool that may be appropriate is the recently enacted PA ABLE Account. There are stipulations with regard to who may establish and fund an ABLE Account, but this tool can often be used hand-in-hand with a Supplemental Needs Trust. For more information on ABLE Accounts see our article titled: “Pennsylvania ABLE: Providing for Our Special Needs Loved Ones” available on our website. 

To discuss what type of planning might be appropriate for you and your family, please contact us for a consultation.

About Our Law Office

At the Estate Planning Centers at The Coulter Law Offices, LLC, we devote our practice to estate planning and assisting families through such transition times with estate and trust administration counseling. We offer guidance and advice to our clients in every area of estate planning, and offer comprehensive and personalized estate planning consultations. For more information or to attend an upcoming seminar, please contact us at (412) 253-7526 or visit us online at www.estateplanningcenters.com.

Disclaimer: The information presented in this article is a conversational summary of a complex area of law and should not be construed to constitute legal advice. No person should rely upon the content of this article for making any decisions, and should instead consult with appropriate legal and tax professionals.