What Happens When a Special Needs Trust Beneficiary Passes Away?

A common question from attorneys regarding special needs trusts is: “What happens when the beneficiary of the special needs trust passes away? What happens to the funds in the trust?” It’s an important question that needs to be explained to the client before setting up the trust.

One of the reasons why the government allows recipients of government benefits to use special needs trusts is the mandatory Medicaid payback provision. This provision states that when the trust is terminated or when the client passes away, if there are any remaining funds in the trust, the Medicaid agencies that have paid on behalf of the client have the right to be reimbursed for all the medical care that they’ve provided to that client. 

Upon termination of the trust, the Medicaid agency sends over records of the benefits provided. The trustee of the trust then goes through the records to double-check the items listed (and ultimately the final payback amount). The trustee will then pay back Medicaid from the remaining funds in the trust. 

Because Medicaid has first priority of payment upon termination of the trust, the Medicaid payback provision is an important provision that clients need to understand. 

If there’s any money left in the trust after Medicaid gets paid back, then the remaining funds pass to whomever the client has listed as the remainder beneficiaries in the trust document. If no election is made, the funds will revert to that client’s estate.

In many cases, Medicaid does get paid back at least some amount of its costs when the client passes away. The special needs trust thus allows both the client to enjoy a higher quality of life — and in many cases, Medicaid is reimbursed in whole or in part.

What if the Funds in the Trust are Exhausted?

If the funds in the special needs trust are exhausted and there’s no money left when the client passes away, Medicaid’s right to recovery from the trust is extinguished. Medicaid does not seek any compensation or reimbursement from the beneficiary’s family or any other personal assets of the beneficiary.

If you have any questions about the mandatory Medicaid payback provision found in special needs trusts, give us a call. Clients may or may not be worried about this provision, but every client needs to understand this provision before setting up a special needs trust.

Note: The information in this article relates to “first-party” special needs trusts. A first-party special needs trust is funded with the assets of the beneficiary. While not discussed here, there are “third-party” special needs trusts that do not require a Medicaid payback provision (because these trusts are funded with the assets of a third-party).

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