Understanding Special Needs Trusts

If you are a parent or guardian of a person with disabilities, you must have wondered why not leave wealth or resources for your child or relative with special needs outright?

If a person with a disability who is receiving or who anticipates receiving government benefits (Social Security Income, Medicaid, Food Stamps, etc.) inherits a significant amount of wealth outright, it can negatively impact their eligibility for government benefits. They will first have to exhaust such an amount or legacy in order to receive any government benefits.

Example- John, a person with down syndrome works at a grocery store and makes about $500/month. John receives SSI and Medicaid benefits. John’s grandmother Martha died and left him a savings account with $200,000. John is automatically disqualified for SSI and Medicaid. In order to qualify for SSI and Medicaid, John will first have to spend-down to the extend that he keeps no more than $2,000.

How can a Special Needs Trust (SNT) help?

A special needs trust (SNT) can be a valuable tool for parents of children with disabilities. One of the primary benefits of a third-party special needs trust is that it allows you to leave an inheritance or gifts for your child with a disability without jeopardizing their eligibility for government benefits. By keeping the assets in the trust rather than giving them directly to the beneficiary, you can ensure that the wealth does not count as income or assets that could disqualify them from programs like SSI and Medicaid. An SNT, at the trustee’s discretion, may pay for anything that benefits the beneficiary alone─ other than food and housing─ without affecting government benefits.

Example- same situation as above, except this time, John’s grandmother Martha left her savings account with $200,000 for a Third-Party special needs trust created for John’s benefit. John is not disqualified for SSI and Medicaid. In fact, the Trustee of the trust disburses $5,000 for John’s dental treatment that is not covered by Medicaid, pays for John’s vacation of Disney land, etc. John can have a fulfilling life because the Trust supplements his government benefits.

 Kinds of Special Needs Trust

When planning for the future of a person with disabilities, it is important to know the kind of vehicle you are using. It can be catastrophic if the right kind of trust is not drafted.

(a)            First-Party Special Needs Trusts (FPSNT)

A first-party special needs trust is funded using the disabled person’s own resources. To name a few examples, these trusts can be funded by personal injury awards, retirement plans, divorce settlements, life insurance proceeds, or inheritance. When assets are placed in a trust, the disabled person is no longer considered to legally own them. This helps preserve eligibility for government benefits, as long as strict requirements are followed, such as, the trust must be irrevocable (it cannot be amended), the beneficiary must be under age 65 at the time the trust is established, the trust must contain a payback provision providing that the state Medicaid agency will receive all amounts remaining in the trust upon the death of the beneficiary, up to an amount equal to the total medical assistance paid, and property in a first-party SNT can only be used for the “sole benefit” of that beneficiary.

(b)           Third-Party Special Needs Trusts (TPSNT)

Third-party trusts are the most common type of special needs trust.  Trust is funded by a parent, grandparent, sibling, or another concerned party. The goal is to ensure that the special needs beneficiary will have the financial resources necessary to enjoy the highest possible quality of life when his or her caretakers are no longer living.

Under a third-party special needs trust, the beneficiary does not legally own the assets in the trust and can’t make spending decisions. The trust is managed by someone selected as a trustee. This could be a family member, friend, or neutral third party.

Trust disbursements can’t be used for cash gifts because this would make the beneficiary ineligible for need-based government programs. However, trust funds can be used to fund personal services, entertainment, travel, transportation, and medical costs not covered by insurance.

Unlike first-party special needs trusts, there are no age limits associated with creating a third-party special needs trust.

When the person with special needs dies, the funds remaining in a third-party special needs trust are not used to repay the state for benefits previously received. Alternative family members can be chosen to receive the benefits of the trust.

(c)            Pooled Special Needs Trusts

Pooled SNT programs can be used to establish both first-party and third-party SNTs. Pooled SNTs are established and administered by a non-profit association for the benefit of multiple beneficiaries. These are a kind of SNT that combines many people’s funds for administrative cost-effectiveness and investment optimization. People have their own sub-accounts and usually receive a proportionate share of the entire fund’s earnings. This gives people access to professional trustees without dealing with financial institutions. Unlike financial institutions and corporate trustees that often require a minimum investment amount, these trusts accept accounts of any size. You can review the performance history of the trust and don’t have to worry about replacing a trustee who becomes ill or otherwise unable to fulfill their duties.

 Like I always say, when it comes to estate planning, there is no 'one size fits all' approach. If you are concerned, discuss your circumstances with a bona fide lawyer. Special needs planning can be challenging, but with professional help and guidance, you can overcome most, if not all hurdles. Good luck!

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https://myspeciallegalplanning.com/