Does a Special Needs Trust Affect Social Security Benefits in South Carolina?

We often field concerns from clients about special needs trusts and their impact on SSI, SSDI eligibility, and Medicaid eligibility. Can setting up a trust, which is an inherently good thing to do for your loved one, actually cost them important benefits? We will discuss this question below.

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Does a Special Needs Trust Affect Social Security Benefits in South Carolina?

Special needs trusts (SNTs) help individuals with disabilities pay for education, living expenses, rehab, and more, while still allowing them to remain eligible for government benefits. But you need to understand how Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI) work in South Carolina.

How Special Needs Trusts Work with Social Security Benefits

Special needs trusts hold assets for the benefit of an individual with disabilities. This does not jeopardize their eligibility for needs-based benefits like SSI when the SNT funds are distributed correctly.

Keep in mind that the Social Security benefit the beneficiary receives is an important factor. SSI is a means-tested program, and it has strict income and resource limits. So yes, an improperly administered SNT can affect eligibility. But SSDI is based on the beneficiary’s work history and payment into the Social Security system. A properly managed SNT typically does not affect SSDI benefits because SSDI eligibility does not depend on the beneficiary’s assets.

How an SNT can Affect SSI Benefits

If the trust is established and administered in accordance with federal guidelines, the assets held in the trust will not count as resources for SSI eligibility purposes.

However, incorrectly disbursed funds will cause problems. For example, payments made directly to the beneficiary for food or shelter are considered "In-Kind Support and Maintenance" (ISM). This can reduce the monthly SSI benefit. The reduction is capped at one-third of the federal benefit rate, plus $20. This is why it is imperative to speak with an attorney about how to manage your special needs trust – payments from the trust need to be made directly to service providers and vendors, not the beneficiary.

In-Kind Support and Maintenance Example

Imagine a trustee uses SNT funds to pay rent directly to the beneficiary’s landlord. This will likely trigger a reduction in their SSI benefits due to the ISM rules. If possible, use the SNT funds for eligible items, like therapy, travel expenses, internet costs, education and more. That said, if the beneficiary’s SSI funds can’t cover their rent, having shelter is the greater priority than risking part of their SSI income.

Types of Special Needs Trusts

First-Party SNTs

If a beneficiary receives a settlement, inheritance, or otherwise “comes into money,” they may choose to fund their own special needs trust. Notably, the federal government includes a provision that any remaining assets in the trust at the beneficiary’s death must be used to reimburse Medicaid for expenses. But when properly administered, a first-party SNT will not impact SSI eligibility. Do not set up a first-party SNT on your own – work with a local trust formation attorney to make sure you are compliant.

Third-Party SNTs

When a parent, grandparent or other benefactor establishes a trust on the beneficiary’s behalf, it is considered a third-party trust. These trusts typically do not include a Medicaid payback provision and offer greater flexibility. They are also exempt from being counted as a resource for SSI purposes if properly structured.

Pooled Trusts

Pooled trusts are managed by nonprofit organizations and hold assets for multiple individuals. Each beneficiary will have a sub-account within the trust, but the funds are pooled for investment purposes (to receive greater returns and compounding interest, for instance). Pooled trusts are a good fit for those with a lower amount of assets, since they have a professional administrator who oversees the pool as a whole.

How can a Trustee Maintain the Beneficiary’s SSI Eligibility?

First, trustees should work with an attorney to draft the trust documents and administer the funds. A special needs trust is meant to help the beneficiary live a fuller and more meaningful life, and prevent administrative errors from getting in the way. Trustees will also need to keep detailed records of all trust activities, especially disbursements. You will also need to avoid any cash payments to the beneficiary that fall outside of the allowable limit.

Contact an Experienced Estate Planning Attorney

When structured and administered correctly, a special needs trust can take care of your loved one while maintaining SSI and Medicaid eligibility; however, creating the appropriate structure and administering the trust are delicate procedures. If you have any questions about establishing an SNT, administering funds, or other estate planning matters, call Bespoke Estate Law. We offer estate planning services in Wilmington, NC, Myrtle Beach, and the surrounding areas.