Special Needs Trusts in Kentucky: Protecting Benefits While Providing for a Loved One
If you have a family member with a disability who receives government benefits like SSI or Medicaid, leaving them an inheritance directly could be the worst thing you can do. Even a modest inheritance can disqualify them from benefits they depend on for housing, healthcare, and daily living expenses. A special needs trust solves this problem by allowing you to provide for your loved one without jeopardizing their eligibility for public benefits.
How Government Benefits Work — and Why Direct Inheritances Are Dangerous
Supplemental Security Income (SSI) and Medicaid are means-tested programs — meaning eligibility depends on the recipient’s income and assets. For SSI, the asset limit is just $2,000 for an individual. If a beneficiary with a disability receives an inheritance of $10,000, their assets immediately exceed the SSI limit, and their benefits are suspended until the excess is spent down. Meanwhile, they may lose Medicaid coverage, including the home health aides, prescription medications, and therapy they rely on.
Third-Party Special Needs Trusts
A third-party special needs trust is created by someone other than the beneficiary — typically a parent, grandparent, or other family member — and funded with the family member’s own assets. Because the trust assets were never the beneficiary’s own property, they are not counted as a resource for SSI or Medicaid purposes, provided the trust is properly drafted. The trustee can use trust funds to pay for things that enhance the beneficiary’s quality of life — specialized medical care, therapies, recreation, travel, electronics, home modifications — without affecting government benefits.
Critically, the trust must be drafted so that it does not give the beneficiary the right to demand distributions. If the beneficiary has an enforceable right to trust income or principal, the trust assets may be counted as available resources. The trustee must have sole discretion over distributions.
First-Party (Self-Settled) Special Needs Trusts
A first-party special needs trust is funded with the beneficiary’s own assets — typically from a personal injury settlement, an inheritance received outright (before a special needs trust was established), or a divorce settlement. Under 42 U.S.C. § 1396p(d)(4)(A), a first-party special needs trust must be established by a parent, grandparent, legal guardian, or court (not by the beneficiary themselves), the beneficiary must be under age 65 when the trust is funded, and the trust must include a Medicaid payback provision — meaning that upon the beneficiary’s death, remaining trust assets must first be used to reimburse Medicaid for benefits paid during the beneficiary’s lifetime.
What the Trust Can and Cannot Pay For
The trustee can use trust funds to pay for supplemental needs — things that government benefits do not cover. This includes dental care beyond what Medicaid covers, eyeglasses and hearing aids, recreational activities and vacations, computers, phones, and entertainment, home modifications for accessibility, private caregivers, and transportation (including vehicle purchase and maintenance). However, the trustee must be careful about paying for food and shelter. Direct payments for food or housing can reduce the beneficiary’s SSI benefit under the “in-kind support and maintenance” rules. There are strategies for managing this, but they require careful planning.
Choosing a Trustee
The choice of trustee is critical. The trustee must understand the complex rules governing special needs trusts and government benefits. A well-meaning family member who makes distributions that disqualify the beneficiary from benefits can cause enormous harm. Many families choose a professional trustee — such as a bank trust department or a nonprofit pooled trust — to manage the trust, sometimes in combination with a family member who can provide personal knowledge of the beneficiary’s needs.
ABLE Accounts as a Complement
Kentucky participates in the ABLE (Achieving a Better Life Experience) program, which allows individuals with disabilities to maintain tax-advantaged savings accounts of up to $100,000 without affecting SSI eligibility. ABLE accounts can complement a special needs trust by providing a simpler mechanism for smaller expenses while the trust handles larger needs.
If you need to establish a special needs trust for a family member in Kentucky, contact Buckles Law Office at (859) 225-9540.
