Estate Planning and the Special Needs Trust

Trusts are a common aspect of estate planning, and Special Needs Trusts are just one of the different types of trusts available. When you have a child with special needs, it is crucial to plan their future with the utmost care while they are still young. Children with a wide variety of special needs (disabilities) can live productive lives with today’s medicine and health care advancements, it is just a matter of setting them up for success.


What is a Special Needs Trust?

A Special Needs Trust (SNT), also known as a supplemental needs trust, is primarily used to hold and protect the financial assets for the benefit of a disabled beneficiary. To qualify for this trust, the beneficiary’s disability must be recognized under the Social Security Act. There are four major types of disability that can qualify someone for a Special Needs Trust: physical, developmental, sensory impaired, and behavioral/emotional. According to the US Census Bureau, between the years 2008 to 2019, we saw the biggest increase in special needs for cognitive difficulties.


Benefits of a Special Needs Trust

  1. Holding assets in a Special Needs Trust does not jeopardize the beneficiary’s access to government assistance (IF trust is properly created and managed).
  2. Greater assurance that the assets in the Special Needs Trust will be used for the benefit of the beneficiary since the trustee maintains absolute discretion over the assets.
  3. Helps maintain a good quality of life for the beneficiary without jeopardizing government-sponsored benefits.

A Special Needs Trust is especially important for beneficiaries who depend on government programs, like Medicaid.


Types of Special Needs Trusts

There are several types of special needs trusts. A First Party Special Needs Trust receives its funding from the special needs person, as long as they are under 65. The funding could come from lawsuit proceeds, inheritance, or lump sum disability benefits. This trust can be established by the special needs child, parent, grandparent, or guardian and, when drafted properly, will not affect eligibility for the special needs person’s government benefits.

Third Party Special Needs Trust is created to permit family members to use their assets to fund a trust to benefit a person with special needs without negatively impacting that person’s eligibility for government benefits. The funds in this trust type do not have a payback provision, so any remaining assets can pass to other beneficiaries listed.

Finally, a Pooled Trust is a community trust that a non-profit organization manages to fund the needs of many special needs beneficiaries. In essence, the non-profit acts as a trustee and can be a good option for small families or people who want non-family member trustees. The property held by pooled trust for the beneficiary should not affect eligibility for government benefits.


Self-Settled Special Needs Trusts

In recent years, people have been talking more about the idea of a Self-Settled Special Needs Trust (Self-Settled SNT), also known as a First-Party Special Needs Trust. In particular, a Self-Settled SNT is an irrevocable, self-funded (by the beneficiary) trust, established by the beneficiary, legal guardian, or court order, using the beneficiary’s own assets.

Until 2016, a Special Needs Trust could only be created by a 3rd party, like a parent, but not by the beneficiary’s spouse nor children. However, the Special Needs Trust Fairness Act allows competent, disabled persons to establish their own trusts. Today, for example, a beneficiary can receive inheritance, create the Self-Settled SNT himself, and fund the trust with the inheritance.

Like a traditional Special Needs Trust, the trustee can be almost anyone, including a family member, friend, professional trustee, or attorney. Unlike a traditional Special Needs Trust, however, the beneficiary is both the Grantor and beneficiary. Since the beneficiary is the owner of the assets, keeping the assets outside of a Special Needs Trust may disqualify him for government benefits. Thus, those assets should be paid into the SNT, which are then excluded from the government aid calculations.

Overall, a Self-Settled SNT allows a disabled beneficiary to benefit from assets within the trust while still receiving government benefits. However, in return, when the beneficiary passes away, the assets remaining in the trust will be used to reimburse the government for medical costs paid through government programs, including Medicaid. For a Self-Settled SNT to work, it must have a pay-back provision to Medicaid.


When to get a Special Needs Trust

It’s important to put protections in place to make sure your disabled loved one or child is taken care of in the event you are no longer able to. For example, advanced directives that specify who should care for your child in the event you are unable to, and legal documents that name a guardian for your child if you are unable to care for your child or in the event of your death.

There are many intricacies to consider when creating an estate plan that involves a special needs trust. If you would like to explore your options in more detail, please give us a call to set up an estate planning consultation. Our estate planning attorneys can walk you through this process and would be happy to meet and discuss your situation and determine the best plan for you and your family.


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