Why Have a Special Needs Trust?

A properly drafted special needs trust (SNT) helps avoid many costly mistakes people make when planning for the future for their child or loved one with a disability.  These mistakes may include, among others:

1.    Inadvertently disqualifying a beneficiary for public benefits;

2.    Disinheriting your child with disabilities;

3.    Relying on your other children to support your special needs child,

4.    Not having a custom plan in your SNT to fit the needs of your child or loved one;

5.    Failing to provide sufficient resources to fund family contact with your disabled child;

6.    Choosing the wrong Trustee to manage the SNT; and

7.    Procrastinating.

What is a Special Needs Trust?

            The purpose of a special needs trust (“SNT), also known as a supplemental needs trust, is to provide funds for the benefit of a disabled individual while ensuring he or she still qualifies for government benefits.  SNT assets, and any income generated, are used to supplement rather than duplicate or replace government benefits. SNT funds may be used to pay for goods and services that Medicaid and other public benefit programs will not supply such as caregivers, vacations, home furnishings, out-of-pocket medical and dental expenses, education, recreation, vehicles, and physical rehabilitation.

There are three types of special needs trusts:

1.         First-party trusts, also known as self-settled trusts;

2.         Third-party trusts; and

3.         Pooled trusts, which can be either third-party or first-party.

All three of these SNTs are designed to manage resources for a person with special needs so that the beneficiary can still qualify, or remain eligible, for public benefits like Medicaid and Supplemental Security Income (SSI).

First-party special needs trust (SNT)

            First-party SNTs holds assets belonging to the beneficiary.  This type of SNT is most often used when the individual with a disability receives a lump-sum of money such as an inheritance or a court settlement. This type of SNT is also useful when the person is older and developed a disability after accumulating assets, and thereafter needs to qualify for public benefits that have an income or asset limitation.

There are several requirements for a first party SNT:

1.    Property in a first party SNT can only be used for the “sole benefit” of that beneficiary;

2.    Must be "irrevocable," that is, unchangeable;

3.    Beneficiary's own assets are used to fund the trust;

4.    Beneficiary must be under age 65 at the time the trust is established;

5.    At the beneficiary's death, the state Medicaid agency must be reimbursed for the Medicaid benefits paid to the Beneficiary (payback provision).

Third-party special needs trust (SNT))

            Third-party SNTs hold assets given by others (such as a parent or grandparent) and have no payback provision. Third-party SNTs are commonly used by family members to plan in advance for a loved one with special needs.  These trusts are typically designed as part of the donor's estate plan to receive gifts that can help a loved one with special needs while the donor is still living and to manage an inheritance for the loved one with special needs when the donor dies. Third-party SNTs can be included in a Last Will and Testament, established within a living trust designed to avoid probate, or drafted as a stand-alone SNT. These third-party SNTs are typically funded upon the death of the beneficiary’s parents or the other individual(s) who established the SNT. A third-party SNT can be the beneficiary of life insurance policies, own real estate or investments, and can even receive benefits from retirement accounts. 

Third-party SNTs come with outstanding benefits:

1.    Properly drafted third-party SNT is an exempt asset for public benefits;

2.    They do not have beneficiary age limits;

3.    There is no limit to how much money can be placed in the trust;

4.    Can be used for almost anything a beneficiary needs to supplement his or her government benefits;

5.    Third-party SNTs do not require a Medicaid payback provision because the money never belonged to the disabled or special needs beneficiary in the first place.  Instead of going to pay the government back, a third-party trust’s assets can be passed on to other relatives and charities after the death of the disabled beneficiary.

Pooled Trusts

            Pooled trusts can be used to establish both first-party and third-party SNTs depending on the source of the assets used to fund the trust. Pooled trusts are established and administered by a non-profit association for the benefit of multiple beneficiaries. Pooled trusts have a separate account maintained for each individual beneficiary of the pooled SNT, but the administrator pools the assets of all accounts for purposes of investment and management. 

            Pooled trusts are useful for trusts with modest assets, or where the beneficiary has no living parent, family member, or legal guardian. If the disabled beneficiary is competent, he or she can contribute to the pooled trust directly. While a person over 65 may participate in a pooled trust, assets transferred to the sub-account after age 65 are subject to transfer of asset penalties. Pooled trusts require a government benefits payback provision for the balance of the funds remaining in the account at the death of the beneficiary.

Experience counts

            It is important that you consult with an experienced elder law and special needs attorney to explore all your options before setting up a SNT. You do not want a SNT that is unnecessarily inflexible and generic. Although an attorney with some knowledge of this area can protect almost any trust from invalidating an individual’s public benefits, many trusts are not customized to your loved one’s needs. Thus, your loved one fails to receive the benefits you provided when they were alive. A well drafted SNT should always:

1.    Earmark assets for support during your life or at your death;

2.    Preserve public benefits while enhancing your child or loved one’s lifestyle;  

3.    Provide framework for management of assets for the beneficiary;

4.    Protect assets from the beneficiary’s creditors and predators.

Most importantly, a customized and flexible SNT gives you an opportunity to provide detailed instructions on how to care for a loved one with disabilities, establish a system to assure those instructions are followed, and provide you with peace of mind.  Take the steps today to protect your special needs family member by setting up a Special Needs Trust.

(The Law Offices of Deirdre W. Edmonds, PA has experienced elder law and special needs attorneys to educate and advise you about options specific to your situation and help develop your loved one’s individual legal plan. Michael Scott Large is an attorney with the Law Office of Deirdre W. Edmonds, PA.  Michael has been practicing law since 1991 and is licensed to practice law in South Carolina, Pennsylvania and New Jersey.  Michael is an active member of the South Carolina Bar currently serving on the Vulnerable Adult Task Force and Elder Law Committees.  Michael is a member of the National Association of Elder Law Attorneys, Horry County Bar, and serves on the Board of Directors for Champion Autism Network.)