A third-party Supplemental Needs Trust differs from the various Special Needs Trusts that have been created through legislation. While both types are designed to provide disabled individuals receiving means-tested benefits such as Supplemental Security Income (SSI) and Medicaid (known Medical Assistance to Pennsylvanians) with additional benefits while not affecting these other benefits, the third-party supplemental needs trust comes with another benefit: it is not subject to any Medicaid “pay-back” provision so that whatever remains in the trust when the disabled beneficiary dies can be distributed to “residual” beneficiaries named in the trust document. However, these must be drafted carefully because these and other benefits will be lost if the requirements for a valid Supplemental Needs Trust, which have been developed primarily through the courts in Pennsylvania, are not followed closely.

Since we are looking at estate planning, we need to focus on the essential elements when a trust is created in a Will. The most important issue in Pennsylvania is determining the intent of the settlor or grantor (both terms refer to the person who created the trust) regarding the use of the property placed in the trust (this property is referred to as the principal or corpus) as well as the income generated by that property. The starting point always is the language in the trust that defines the settlor’s intent. However, we also have to look at how the trust actually will function to really grasp the reason(s) that it was created.

Two major factors in proving that a supplement needs trust was established are the number of beneficiaries for which the trust provides and whether the beneficiary who is disabled was receiving some type of means-tested assistance, such as SSI or Medical Assistance, during the settlor’s lifetime. Multiple beneficiaries, even if they are only residual beneficiaries, are important because the trustee in charge of handling decisions involving the trust has an obligation to all beneficiaries and cannot use the funds for only one beneficiary’s interests. The presumption is that the settler did not intend the entire supplemental needs trust to be used to help only one person to the exclusion of all other beneficiaries.

Also, if the settlor knew that the one beneficiary, perhaps his or her child, was getting means-tested government benefits such as SSI and Medical Assistance when the estate plan was developed, courts have presumed that the settlor would not want to jeopardize the eligibility of the child, for example. Passing these “tests” does not ensure that a trust will pass muster with the government. There are other factors that need to be handled properly to establish a successful third-party Supplemental Needs Trust.

Briefly, these include the beneficiary who receives government assistance being prevented from having any authority to terminate the trust or from directing that any part of the trust be used for her or his support and maintenance. Instead, the trustee must have complete discretion regarding what distributions will be made and for what purposes. Because a supplemental needs trust exists to supplement, not supplant, the benefits already being received, language is needed to keep the trustee from making distributions that would have a negative impact on the current sources of income (which, as noted above, generally is means tested). In fact, the trustee has to avoid giving money directly to the beneficiary since this would be considered income. However, as long as payments directly to third parties do not involve shelter or food (which SSI regulations look upon as income for the beneficiary), the trustee can purchase goods or services for the disabled beneficiary of the supplemental needs trust.

A couple of final points are to be remembered, as well. Any assets that go into the third-party supplemental needs trust must belong to someone other than the beneficiary – otherwise, this could not be a third-party trust, severely hindering the usefulness of the trust as a result. In addition, the settlor would be wise to include a “spendthrift” clause in the trust document so that creditors of disabled (and other) beneficiaries generally will be prevented from making any claims against the principal or income of the trust as long as money is not given directly to the beneficiary, which is an effective way to protect the wealth within the trust from creditors of a beneficiary other than the federal and state governments.

The third-party Supplemental Needs Trust has strengths and potential weaknesses that must be considered carefully to determine if it can work as part of your estate plan. If it can fit within your estate plan and if you believe that is needed due to your family’s circumstances, then you should seek out a professional to draft the trust due to its complexities. The crucial elements of a supplemental needs trust are set forth here, but you want to be sure that everything is in its proper place and worded properly so that your intent to assist a disabled beneficiary of the trust will be carried out successfully.