Special Needs Trusts FAQ

Trust funds are a diverse class of legal documents. They are versatile estate planning tools. Each type of trust, however, shares a few common characteristics.

All trusts involve an arrangement in which a grantor (settlor or trustor) transfers assets to a trustee to benefit a beneficiary.

Though the trustee owns the assets, they do so subject to a strict "fiduciary duty" obligating them to manage the trust assets responsibly, productively, and for the benefit of the trust beneficiary.

A special needs trust (SNT) is a specialized trust that sets aside funds for a beneficiary with a disability. The goal is to strengthen financial security for a disabled individual. It can enhance the quality of life for a disabled person without disqualifying them from need-based government benefits. Without a special needs trust, the individual who receives financial help from a loved one may no longer qualify for means-tested benefits.

What is a special needs trust?

SNTs supplement—not replace—government benefits provided to beneficiaries with a disability. For this reason, they are also known as supplemental needs trusts. SNTs supplement needs Supplemental Security Income (SSI) and Medicaid do not cover. Please note Supplemental Security Income (SSI) is distinct from Social Security (SS).

Because eligibility for these public benefits is need-based, there are income limits. An individual with a disability whose total assets or monthly income are too high could be disqualified. If you leave assets to a loved one with a disability, there could be unintended consequences. Leaving them assets in a will or direct disbursements from a trust may disqualify them from these benefit programs by over-providing.

A well-formed SNT solves this problem in two ways. The trustee owns the trust assets. Thus, they are excluded when calculating the beneficiary's initial eligibility for government benefits. The trustee must maintain and use the trust assets to benefit your loved one with a disability. The trust terms must clarify that the trustee holds absolute discretion in achieving this goal.

Second, unlike most trusts, an SNT beneficiary does not—and cannot—receive direct disbursements from the trust. This protects the beneficiary's eligibility by ensuring their assets and income never exceed the disqualifying threshold.

Are all special needs trusts the same?

There are two types of special needs trusts: first-party and third-party. Both types ensure that trust assets benefit a beneficiary without giving them direct access to the funds. However, first- and third-party SNTs also feature a few important distinctions.

First-Party Special Needs Trusts:

• Who funds the assets? A parent, grandparent, legal guardian, or court can create a first-party SNT. However, the trust assets originally belonged to the person with a disability.
• Is there an age restriction? Yes. The beneficiary must be under 65 years old.
• Can the trust terms be changed? No. First-party SNTs must be irrevocable. Once a grantor creates an irrevocable living trust, a grantor cannot change its terms.
• What happens to the remaining funds? First-party SNTs are subject to a payback requirement at the beneficiary's death. This means that when the beneficiary dies, the remaining trust assets are reimbursed to the government. According to the trust instructions, the trustee can distribute any remaining funds when the beneficiary dies.

First-party SNTs are sometimes called "self-settled SNTs" or "Medicaid payback trusts." They may be referred to as "(d)(4)(A)" or "(d)(4)(C)" trusts in reference to sections in the federal statute authorizing this kind of trust as well.

Third-Party Special Needs Trusts:

• Who funds the assets? In a third-party trust, the grantor and beneficiary are different people. In other words, someone other than the beneficiary provides the assets in a third-party SNT.
• Is there an age restriction? No. Benefit eligibility from a third-party trust is open to a disabled person of any age.
• What happens to the remaining funds? A third-party SNT is not subject to a government "payback" requirement. According to the trust instructions, the trustee can distribute any remaining funds when the beneficiary dies.
• Can the trust terms be changed? A third-party SNT can be revocable or irrevocable. If the trust is revocable, the grantor reserves the power to change the trust terms.

When are first-party and third-party special needs trusts used?

Both kinds of SNTs accomplish the same goal. They ensure that an individual with a disability benefits from trust assets. At the same time, trust administration occurs in a way that does not disqualify them from need-based government programs. Both caregivers and family members concerned for the long-term well-being of a loved one with a disability typically set up an SNT. Again, the key difference is who provides the funds.

A third-party SNT is straightforward. In this kind of SNT, a third-party grantor funds the trust. The funds never belong to the beneficiary.

By contrast, the funds in a first-party SNT always belong to the beneficiary before being transferred to the trust. This situation may arise, for example, if an individual with a disability receives a large amount of money. This could happen when the individual receives:

• A large inheritance
• Proceeds from a life insurance policy
• A personal injury settlement

The sudden windfall might disqualify them from their government benefits. To avoid this, the assets are set aside in an SNT.

There is an added benefit. Remember that a first-party SNT is always irrevocable. The beneficiary does not own or control them. Thus, if the beneficiary is sued, the first-party SNT funds in an irrevocable trust cannot be touched. By contrast, a third-party SNT is only sometimes irrevocable. A revocable trust generally does not shield trust assets from creditors and court judgments.

How does a beneficiary receive funds?

How does the beneficiary reap the benefits of the trust? Simple. The trustee uses the trust assets to purchase necessities for the beneficiary.

Remember, an SNT beneficiary cannot control the trust assets or receive direct distributions. Direct distributions compromise their eligibility for need-based government benefits. Therefore, the SNT trustee receives full discretion to spend on the beneficiary. They can purchase health care products, other services, and supplies to supplement the beneficiary's government benefits.

This might include the following:

• Personal care attendants
• Vacations
• Home furnishings
• Uncovered medical expenses
• Education
• Vehicles
• Physical therapy
• Recreational activities

The beneficiary holds no sway over these purchases.

As in all trusts, the trustee is constrained by their fiduciary duty to manage the funds to benefit the beneficiary. The trustee of an SNT must be a person who will honor their duty. A breach of fiduciary duty can lead to serious legal consequences.

What is a pooled special needs trust?

A pooled SNT combines ("pools") assets from multiple SNTs. Specialized nonprofit organizations manage and invest pooled assets. The beneficiary of each SNT gets a separate account and their own professional trustee chosen by the nonprofit. These trustees purchase things to supplement the beneficiary's living arrangements. The appointed trustee acts just like a trustee appointed by the individual's family.

What's the benefit of a pooled SNT? By combining the resources of many beneficiaries, pooled trusts can:

• Reduce fees
• Improve the collective pool's investment potential
• Provide access to a suitable trustee

The remaining funds are distributed according to the trust agreement when the beneficiary dies. Those funds may sometimes be distributed to the nonprofit to further the organization's charitable mission. The remaining funds may still be subject to government "payback" requirements. These rules vary from state to state.

Do I need a lawyer to set up a special needs trust?

In many cases, an inheritance through a will may not ensure the long-term security of a family member with special needs. An SNT can help ensure your loved one receives adequate support for years.

Creating an effective SNT using reputable do-it-yourself guides and forms is possible. That said, these trusts can be complex. The governing law varies from state to state. You may not feel confident handling your special needs planning alone. In such cases, it's best to seek legal advice from a local estate planning attorney.

Remember, a poorly drafted trust document can lead to serious consequences. It may undermine your good intentions. Therefore, even if you take the do-it-yourself route, having an attorney review your work is still a good idea.