If someone you care about has a disability, you’ve likely thought about how to protect their future. You want them to have the best possible quality of life, especially if you’re no longer around to provide support.
However, well-meaning gifts or inheritances can actually cause more harm than good if they’re not structured properly. Let’s look at the complete picture with an emphasis on the supplemental needs trust.
Why a Traditional Inheritance Can Backfire
Medicaid (AHCCCS in Arizona) and SSI help individuals with disabilities cover medical care and basic expenses. Since these are need-based benefits, there is a $2,000 limit on countable assets.
If you leave assets directly to your loved one through a will, joint account, or beneficiary designation, those funds are counted against the limit. In that case, benefit eligibility can be disrupted.
The good news is that you can plan ahead to avoid this outcome. A supplemental needs trust preserves access to benefits while allowing you to enhance your loved one’s life with additional resources.
What a Supplemental Needs Trust Does
A supplemental needs trust (sometimes called a special needs trust) is a legal device that holds assets for the benefit of a person with a disability. The key feature is that the trust owns the assets.
Because the funds are not under the beneficiary’s control, they are not counted as personal resources for eligibility purposes.
The trustee manages the assets and uses them to pay for goods and services that improve the beneficiary’s life but are not covered by public programs. Examples include:
- Education and training
- Personal care aides
- Therapy or rehabilitation
- Transportation and vehicle modifications
- Travel or entertainment
- Computers, phones, or internet access
- Household furnishings
The trust cannot make direct cash payments to the beneficiary, and distributions must be made carefully to avoid interfering with benefit eligibility.
First-Party vs. Third-Party Trusts
There are two main types of supplemental needs trusts, and the difference matters.
A first-party trust is funded with the beneficiary’s own assets. This might come from a legal settlement, back pay from Social Security, or an inheritance that was already received.
Under federal and Arizona law, a first-party trust must include a Medicaid payback clause, which means any funds left in the trust after the beneficiary’s death must be used to reimburse the state for medical expenses paid through AHCCCS.
A third-party trust is funded by someone else, typically a parent, grandparent, or other family member, as part of their estate plan. This type of trust does not require Medicaid payback and gives you more flexibility in design and distribution.
When planning for a loved one with special needs, a third-party supplemental needs trust is often the preferred option because it allows you to provide long-term support without disrupting benefits or triggering repayment.
Who Manages the Trust?
Every supplemental needs trust must have a trustee. This is the person or institution responsible for managing the trust’s investments, paying expenses, and keeping records.
The trustee has a fiduciary duty to act in the best interests of the beneficiary and must follow strict rules when making distributions.
You can choose a family member, a trusted friend, or a professional fiduciary. Many people select a professional trustee when the trust will hold significant assets or when the rules around benefit eligibility are too complex to navigate alone.
Let’s Get Started!
With estate planning offices in Tucson, Oro Valley, Phoenix, Mesa, Chandler, Scottsdale, the West Valley, Flagstaff, Sedona, Prescott, and Carefree, we are here to help Arizonans protect their legacies.
To set the wheels in motion, call us at 888-222-1328 or send us a message through our contact page.
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