Special Needs Trust: A Primer
Special Needs Trusts: A Primer
We hear the term “Special Needs Trusts” with some regularity, and many of us have a general idea as to when they are needed. However, the details can get confusing. Here’s a brief explanation as to what they are, how they work, and when they should be used:
What are Special Needs Trusts? Special Needs Trusts come in several forms, depending on whose money is funding the trust. That is generally the determining factor.
First-Party Special Needs Trusts. These are trusts governed under federal law, 42 U.S.C. 1396p(d)(4)(A). They are trusts whose funds are contributed by a disabled person, for his or her own benefit. The Trustee can be a financial institution or family member. These are Irrevocable Trusts and the funds are contributed by the disabled person during the life of the disabled person.
Pooled Special Needs Trusts. These are trusts governed under federal law, 42 U.S.C. 1396p(d)(4)(C). They are trusts whose funds are contributed by a disabled person, for his or her own benefit. The Trustee must be a non-profit institution dealing with persons with disabilities. These are Irrevocable Trusts and the funds are contributed by the disabled person during the life of the disabled person.
Third-Party Special Needs Trusts (or Supplemental Needs Trusts). These are trusts governed under state law. They are trusts whose funds are contributed by a third-party (other than the disabled person). The Trustee can be a financial institution or family member. The funds can be contributed by a person during his or her life, or via his or her Last Will and Testament, for the benefit of a living disabled person.
How do Special Needs Trusts work?
First-Party Special Needs Trusts. There are several requirements for such a trust: (1) the contributing person must be disabled, as defined by 42 U.S.C. 1382(c); (2) the funds must be contributed by the person prior to the age of 65; (3) expenditures from the trust must not be made for a broad standard of benefit for the disabled person, but rather may only supplement but not supplant public benefits to which the disabled person may be entitled, and the Trustee must have the absolute authority and discretion not to distribute funds to the disabled beneficiary; (4) they must be created by a parent, grandparent, guardian, or Court for the benefit of the disabled person (even though they contain the funds of the disabled person); and (5) the trust contains a payback provision to repay the state agency responsible for payment of Medical Assistance services to that individual. There are significant restrictions on the nature of such trust, and generally are approved by the Social Security Administration and Department of Human Services prior to implementation.
Pooled Special Needs Trusts. Instead of being formed by a standalone trust document, these trusts are usually formed by a joinder agreement with a non-profit agency. The funds contributed by the disabled individual are aggregated with the funds of other disabled individuals, though held separately for payment to the disabled individual contributing the funds. Upon the death of the disabled person, any remaining funds remain in the pooled trust for the use and benefit of other disabled persons. The other restrictions above generally will apply, as the funds may only be used for the supplemental benefit (rather than supplanting other benefits) of the disabled individual.
Third-Party Special Needs Trusts (or Supplemental Needs Trusts). The standard for distribution of such funds can be less restrictive than in the prior trusts (First Party and Pooled Trusts), but the distribution standard should still be limited to allow for future eligibility for public benefits. Typically, they should also contain the requirement that funds be used only to supplement, but not supplant public benefits. Further, they should be limited to the sole benefit of the disabled individual during his or her life. Upon the death of the disabled individual, the funds can then pass to a non-disabled person(s). Such trusts do not have to be funded during the Grantor’s life, but can be.
When are Special Needs Trusts used?
First-Party Special Needs Trusts. Should be used when families desire to protect the funds of a disabled individual, or when ownership of those funds will prevent the disabled individual from obtaining public benefits such as Medical Assistance or other welfare-type benefits (state or federal). Useful when the amount of disabled individual’s countable resources are greater than $100,000 (otherwise, family can consider using an ABLE Account).
Pooled Special Needs Trusts. Should be used when families desire to protect the funds of a disabled individual, or when ownership of those funds will prevent the disabled individual from obtaining public benefits such as Medical Assistance or other welfare-type benefits (state or federal). Useful when the amount of disabled individual’s countable resources are greater than $100,000 (otherwise, family can consider using an ABLE Account). Less cost to funding and creation (typically) than First-Party Special Needs Trust, so can be good for medium range amounts of funds, or when an ABLE Account is not appropriate. Also, serve well when an appropriate Trustee cannot be found, since management by non-profit agency can assist in Trustee work.
Third-Party Special Needs Trusts (or Supplemental Needs Trusts). Should be used when a person desires to protect assets for the benefit of a disabled child, relative, or other person. In other words, these are used when the person contributing the funds and the disabled person are not the same person. These are best used in Wills of persons desiring to leave funds upon their deaths to disabled individuals. Also, great applications in public benefits planning for parents seeking nursing home care who have disabled children.
