Special Needs Trusts in Maryland: A Family's Guide to Protecting Benefits and Planning for the Future

The problem a direct inheritance creates

A well-meaning parent or grandparent may leave money directly to a family member with a disability, believing that the inheritance will provide additional financial security. Unfortunately, a direct inheritance can jeopardize eligibility for important means-tested benefits such as Supplemental Security Income (SSI) and Medicaid.

This is one reason special needs planning should be handled carefully. These programs have strict financial eligibility requirements, and even a relatively modest inheritance can create problems if it is left directly to the beneficiary.

A properly prepared special needs trust allows assets to be set aside for the benefit of a person with a disability without those assets generally being treated as the beneficiary's own resources for SSI and Medicaid eligibility purposes. The trust can be used to pay for additional needs and expenses that improve the beneficiary's quality of life while preserving access to important public benefits.

The two main types of special needs trusts

The most important question is whose money will be placed in the trust. A special needs trust funded with money belonging to a parent, grandparent, or other family member is treated differently from a trust funded with the beneficiary's own money.

Third-party special needs trusts

A third-party special needs trust is funded with money belonging to someone other than the person with a disability. For example, parents or grandparents may create this type of trust to provide an inheritance for a child or grandchild without jeopardizing eligibility for Medicaid or SSI.

One of the biggest advantages of a third-party special needs trust is that there is generally no Medicaid repayment requirement when the beneficiary dies. Any money remaining in the trust can pass to the family members or other beneficiaries named in the trust.

For families planning an inheritance for a loved one with a disability, this is often the preferred way to provide financial support while protecting eligibility for public benefits.

First-party special needs trusts

A first-party special needs trust is different because it is funded with money that already belongs to the person with a disability. This may include money received from a personal injury settlement, an inheritance that was left directly to the beneficiary, or other assets belonging to the beneficiary.

Because the beneficiary's own money is being protected, these trusts are subject to stricter rules. The beneficiary generally must be under age 65 when the trust is established and funded, and the trust must provide for repayment of Medicaid benefits after the beneficiary's death before any remaining funds can pass to other beneficiaries. Federal law governing these trusts is found at 42 U.S.C. § 1396p(d)(4)(A). Maryland also has specific Medicaid requirements for the creation and approval of these trusts.

Pooled special needs trusts

A pooled special needs trust provides another option. Instead of creating an individual trust, the beneficiary has a separate account within a larger trust managed by a nonprofit organization. The nonprofit combines the assets of many beneficiaries for investment and management purposes while maintaining a separate account for each person.

A pooled trust can be particularly useful when the amount of money involved does not justify the expense or administration of creating a separate stand-alone trust.

Maryland-specific rules every family should know

Special needs trusts require careful benefits planning

Creating a special needs trust is only part of the planning process. How money is placed into the trust and how it is later used can affect the beneficiary’s eligibility for SSI, Medicaid, and other public benefits.

A properly structured special needs trust can pay for many expenses that improve the beneficiary’s quality of life without jeopardizing important benefits. However, certain distributions, particularly those involving housing or direct payments to the beneficiary, can affect SSI and must be handled carefully.

An ABLE account may also be used together with a special needs trust in appropriate circumstances. Together, these planning tools can provide greater flexibility while helping preserve eligibility for public benefits.

Because SSI and Medicaid rules can change, special needs planning should consider both the inheritance you want to provide and the benefits and services your loved one may need throughout their lifetime.

What a special needs trust can, and cannot, pay for

Appropriate uses include: adaptive equipment, private therapies not covered by Medicaid, technology and communication devices, education and vocational training, recreation and travel, transportation, personal care items, dental and vision care beyond Medicaid's coverage, and entertainment. The constraint is that distributions must genuinely benefit the beneficiary and must not provide the beneficiary with cash — which would count as income for SSI purposes. The trustee pays the vendor; they never give the beneficiary money to pay the vendor themselves.

Choosing a trustee

Choosing the right trustee is especially important for a special needs trust. The trustee will be responsible not only for managing the trust assets, but also for making distributions in a way that does not unnecessarily interfere with the beneficiary's eligibility for SSI, Medicaid, or other public benefits.

A trusted family member may be a good choice, but the person should understand the responsibilities involved and be willing to obtain professional guidance when necessary. In some cases, families may choose a professional trustee or give a family member additional professional support.

The beneficiary generally should not serve as trustee of their own special needs trust because having control over the trust assets may jeopardize the protections the trust was designed to provide.

Letter of intent

A letter of intent can be an important addition to a special needs plan. Unlike the trust, it is not a legal document. Instead, it provides future trustees and caregivers with practical information about your loved one that cannot easily be captured in a trust agreement.

The letter can describe daily routines, medical and personal needs, communication preferences, important relationships, activities, and other information that will help someone understand how best to care for and support the beneficiary. Although it is not legally binding, it can provide valuable guidance to the people who may one day have to make decisions when a parent or caregiver is no longer there.

Common planning mistakes

• Leaving assets directly to a beneficiary with a disability in a will, rather than routing them through a third-party Special Needs Trust.
• Using a generic trust template that lacks the specific language required for SSI and Medicaid compliance.
• Failing to get Maryland AG approval for a first-party trust before funding it.
• Naming the beneficiary as trustee of their own trust.
• Telling other family members to "just leave the money to me and I'll take care of [the beneficiary]." This informal arrangement creates estate tax and gift tax problems, puts the funds at risk if that family member divorces or dies, and provides no legal protection for the beneficiary.
• Forgetting to update beneficiary designations on life insurance and retirement accounts.

This article provides general information about special needs trust planning under Maryland law and is not legal advice. Public benefits rules change periodically. The Maryland AG approval requirement for first-party trusts must be completed correctly; consult a licensed Maryland attorney experienced in special needs planning before establishing or funding any trust for a beneficiary who receives means-tested public benefits.