What Is a Special Needs Trust?
- A special needs trust controls assets that support a beneficiary with special needs. The trust can help a beneficiary remain eligible for needs-based government assistance programs like Social Security, Medicare and Medicaid.
When someone wants to ensure that, upon their death, their property is disbursed according to their wishes, they sometimes establish a legal agreement known as a trust.
A trust agreement details the person’s wishes, and it can help reduce estate taxes, protect property and avoid the need for probate (a judicial process during which a person’s will and their beneficiary are “proved” in court).
There are many types of trusts. A special needs trust can be useful when the trust beneficiary has special needs caused by physical and/or mental disability. In this case, the special needs trust helps protect the beneficiary’s eligibility for federal and state benefits programs that require income or assets be at or below a certain limit, such as Medicaid and other benefit programs.
What Is a Trust?
A trust is a legal agreement among three parties:
- A donor who funds the trust
- A trustee who is legally bound to hold and administer the funds according to the donor's wishes
- A beneficiary or beneficiaries who receive the benefit of the trust funds
In most cases, the donor specifies his or her wishes in a document with instructions for the trustee regarding the use of the trust assets. The trust’s creator chooses a trustee to control the trust and manage and disburse funds.
Trusts are common estate planning tools because they offer a low-cost way to manage the donor's assets after the donor’s death.
How Does a Special Needs Trust Work?
A special needs trust (SNT) is a legal arrangement that creates a fiduciary responsibility for the designated trustee to manage assets for a physically or mentally disabled or chronically ill person without impacting their eligibility for the public assistance disability benefits provided by Social Security, Supplemental Security Income (SSI), Medicare or Medicaid.
This is important because public assistance programs for people with special needs include certain income and asset restrictions. The beneficiary can still receive income from the trust, but that income and the assets put in the trust do not count against those public assistance limits.
What Does a Special Needs Trust Pay For?
A special needs trust is designed to fund the beneficiary’s needs that public assistance does not cover. The assets placed in the trust are not included when qualifying for public assistance as long as they are not used for some exempted food or housing expenses.
The trust’s assets are often used to cover medical, caretaker, transportation and other allowable expenses.
Three Types of Special Needs Trust
There are three common types of special needs trusts.
- First-party trust
In a first-party trust, the assets belong to the person with special needs. The funds in the trust can support the beneficiary until he or she dies. Upon death, any assets left in the trust are used to repay the state government for medical care costs provided by Medicaid.
The Special Needs Alliance says that first-party SNTs are most often used when the special needs person inherits money or property outright or is awarded money in a court settlement. “They also are useful when a person without a prior disability owns assets in his or her name, later becomes disabled, and thereafter needs to qualify for public benefits that have an income or asset limitation,” the SNA says.
- Third-party trust
In a third-party trust, the assets belong to another person or persons – such as parents, grandparents, siblings or guardians – who use their assets to assist the beneficiary who has special needs. These trusts can hold any type of asset, including a house or other property, stocks, bonds and other investments.
A third-party special needs trust does not include the Medicaid payback requirements of a first-party trust. When the special needs beneficiary dies, the remaining funds in the trust can be passed to other family members or donated to charity.
According to the Special Needs Alliance, third-party SNTs can be included in a last will and testament, established as a living trust to avoid probate or be created on its own. They are typically funded upon the death of the person or persons who establish the trust.
- Pooled trust
A pooled trust, also known as a (d)(4)(C) trust, includes funds for a group of different beneficiaries with special needs. This trust, which can be drafted as either a first-party or third-party SNT, is created under the umbrella of a non-profit organization that comprises individual beneficiaries who “pool” their assets while maintaining separate accounts in the trust.
These pooled assets from many beneficiaries are used “to make more stable investments and provide additional management services that a plain vanilla special needs trust might not be able to afford.” When an individual beneficiary dies, his or her remaining funds are used to reimburse the government for medical care, with a portion used to fund the non-profit organization that manages the trust.
What Are the Benefits of a Special Needs Trust?
A special needs trust benefits the beneficiary by providing financial support without jeopardizing his or her eligibility for income-restricted programs or services. The person or persons who establish the trust benefit in knowing that their loved one will be supported in the ways they wish.
In addition, special needs trusts are irrevocable, which means the assets in the trust cannot be seized by creditors or through a lawsuit.
Finally, a properly drafted trust can play a role in tax planning, and gifts into the trust may reduce the size of the donor's taxable estate in certain situations.
A special needs trust can a valuable tool for helping a person with special needs fund his or her care while still qualifying for government needs-based assistance. There may also be tax benefits for those who establish the SNT.
Every situation and beneficiary is different, and the tax laws are complicated. The best way to create a special needs trust that meets your needs is to speak with a qualified special needs planner.