What Is a Special Needs Trust?
A special needs trust, also known as a supplemental needs trust or SNT trust, is a legal structure set up for a person with a disability. These trust funds can include current assets or be set up to receive funds the beneficiary will receive in the future. They are designed to hold and protect assets for the benefit of a beneficiary with special needs.
This legal structure is used in order to collect and manage assets, and it can receive contributions from sources including:
- Assets gifted from family members during their lifetime
- An estate plan, when parents or other relatives wish to provide life insurance proceeds or assets at their death as an inheritance
- Assets from a legal settlement
The trust will end when it is no longer needed. Typically, this occurs at either the death of the beneficiary or when funds have been spent.
Special Needs Trust Law: Preserving Government Benefits
Careful planning is essential if you want to leave property or money to a loved one with special needs. By leaving a loved one with a disability a gift like this, you could inadvertently jeopardize their ability to receive both Medicaid and Supplemental Security Income, or SSI, benefits that your loved one needs. Setting up a special needs trust can help avoid some of these issues.
A few things will not disqualify a person from receiving Medicaid or SSI, such as the following:
- Owning a car
- Owning a house
- Owning furnishings
- Owning other personal effects
However, other assets such as cash in the bank will disqualify someone from receiving these benefits. For instance, leaving a loved one $10,000 will disqualify them from getting SSI or Medicaid if you make that gift in cash.
That's where special needs trusts come in. Rather than leaving a loved one cash or property directly, you will instead leave those assets to their special needs trust.
When creating a special needs trust, you must also choose a person to serve as a trustee. That person will have the total discretion of the property in the trust, and they will also be in charge of spending money on behalf of your loved one. Because your loved one then has no control over the assets in the fund, administrators for SSI and Medicaid will ignore their trust assets when determining program eligibility.
Other Reasons to Create a Special Needs Trust
Not everyone with special needs qualifies for government programs, including SSI. However, there are still other reasons you may want to set up a special needs trust, such as to protect assets from creditors or to provide assets in a divorce.
Special needs trusts may even be required as a part of a divorce agreement. This can happen for a few reasons, including:
- Using a trust structure to receive child support payments to benefit a child with a disability so that the child support payments are not considered to determine government aid eligibility
- Using the trust to accumulate assets that are earmarked for the child to use in the future
- Using a trust when life insurance coverage is revised for either parent
Types of Special Needs Trusts
There are three main kinds of special needs trusts. The source of funding governs the kind of trust needed as well as the rules that apply to that trust.
First-Party Trusts
You would use a first-party special needs trust when the assets contributed to the trust belong to the trust beneficiary, such as when the individual receives a legal settlement or an inheritance. As the beneficiary is considered the owner of these assets, paying the assets into a special needs trust excludes them from calculations for government aid.
While first-party trusts allow the beneficiary to maintain government aid even though they may have substantial wealth in the trust, there is a trade-off: The government can claim any assets remaining for reimbursement for medical and other costs that were paid using government programs when the beneficiary dies.
Third-Party Trusts
You would use a third-party special needs trust when assets that fund the trust come from someone besides the beneficiary. One significant advantage to these types of trusts is that family members have the ability to contribute various assets, including property such as a home and investment assets.
Third-party trusts also allow beneficiaries to qualify for government aid. As the funding assets belong to someone other than the beneficiary, there is no government reach-back with this kind of trust when a beneficiary dies. That means a family may direct a successor beneficiary and either keep the wealth within the family or direct it to a desired charity.
Pooled Trusts
You may consider a pooled trust either if you cannot find a good candidate to serve as trustee or you plan to leave only a relatively modest amount of money. Pooled trusts, also known as community trusts, are special needs trusts that nonprofit organizations run. These types of trusts are available in many areas of the United States.
A pooled trust combines and invests funds from many families. Each beneficiary of the trust still has a separate account, but funds are administered together in order to simplify administration and reduce costs. The nonprofit determines the trustee, and then the trustee spends money on behalf of all beneficiaries.
As with first-party trusts, pooled trusts have a requirement for government reimbursement. Additionally, pooled special needs trusts have a provision requiring some remaining assets to be passed to the nonprofit in exchange for trust management.
Here is an article about how to set up special needs trusts.
Designating a Trustee
The ability to appoint a trustee who will manage investment decisions as well as oversee asset distribution offers a big benefit when it comes to special needs trusts. A trustee will fill a key role in watching and administrating assets and spending decisions if the beneficiary cannot independently manage their finances. Trustees are required to make sure that assets are used following the initial intentions as well.
A trustee may be a sibling or another family member; at the same time, families sometimes decide another trustee may be a better fit for this role. As selecting a trustee may be difficult, many people choose to get the advice of a lawyer to discuss who would be the most prepared to carry out duties expected of the trustee. Here is an article about considerations when choosing a trustee for a special needs trust.
Further, you will typically name a successor trustee after designating an initial trustee. You would do this in the event your first choice cannot serve for whatever reason.
How Can Special Needs Trust Funds Be Spent?
A special needs trust fund can be used in a variety of ways. While the trustee cannot give money to your loved one directly as that would interfere with Medicaid and SSI eligibility, they can spend trust assets to obtain a range of services and goods.
Special needs trust funds often are used to pay for:
- Education
- Home furnishings
- Out-of-pocket dental and medical expenses
- Personal care attendants
- Physical rehabilitation
- Recreation
- Vacations
- Vehicles
Families often choose to set up a special needs trust with the help of a lawyer who can advise on details about taxes and estate planning, as well as make sure the recipient of the trust can continue to receive government benefits. Working with an experienced lawyer can help ensure the details of the trust are properly in place.
