An issue in Estate Planning that will not arise often, but can be a very important issue to the families who need them, is a Special Needs Trust.  A special needs trust (or supplemental needs trust) is a tool that can help provide for the needs of an individual who is disabled, without jeopardizing his or her eligibility for government benefits. A well-qualified attorney, who specializes in this area of the law, working alongside your advisor can be great resources in setting up the trust and providing proper information on the choices available in your state.

Special Needs Trusts (SNTs) include not only trusts funded with an individual’s own funds, but also trusts funded with assets from a third party (e.g., a parent, grandparent, or other party).  Federal and state benefits are generally available to qualifying children and adults who have special needs. If your child qualifies for government benefits, one of your goals may be to ensure that his or her eligibility continues into the future.  A special needs trust can help you attain this goal.  Additionally, this type of trust can provide for supplementary care and services for your loved one.  In determining eligibility for Medicaid and other programs, a state may count only the income and assets that are legally available to the applicant. A special needs trust restricts the beneficiary’s own direct access to the assets in the trust to such an extent that the assets are not considered legally available to the beneficiary. Thus, a special needs trust can protect Medicaid eligibility because assets in the trust are uncountable/unavailable directly to the individual.

Children and adults with special needs who have limited income and resources often receive monthly benefits from Supplemental Security Income (SSI). These cash benefits can be used for basic needs such as housing and food.  But because SSI benefits are needs-based, inheriting money can mean that a child with special needs will lose his or her eligibility for this benefit program. By naming a special needs trust as the beneficiary for your child, assets can be devoted to the care of your loved one.  Since SSI recipients are often automatically eligible for Medicaid benefits, preserving your child’s eligibility for SSI may preserve his or her eligibility for Medicaid as well.  A special needs trust can be especially useful if you want to provide care and services necessary for your child’s well-being, without eliminating Medicaid benefits. Although Medicaid pays for a number of medical costs, including hospital bills, physician services, and long-term care, it will not subsidize items and services considered nonessential. These may include health-related expenses of eyeglasses, dental care, rehabilitation services, and home health aide services; as well as personal expenses such as transportation, computer equipment, and vacations.  By giving the trustee sole discretion over the distribution of trust income and principal, the beneficiary will have no control over the trust and no right to demand distributions.  The trustee must purchase goods and services directly on the beneficiary’s behalf, instead of giving the beneficiary money from the trust to purchase items needed.

The following rules apply to SNTs created for individuals who meet the eligibility requirements of disability or special needs:

• Generally, only a parent, grandparent, legal guardian, or court can set up a special needs trust. The person with disabilities, no matter how competent, cannot ordinarily be the “creator” of the trust (even if the trust is funded by his or her personal assets).

• Funds in the special needs trust may not be available to the beneficiary.

• The beneficiary cannot revoke the trust.

• The individual with special needs must be considered “permanently and totally disabled” under SSI criteria. Different rules apply to adults and children.

• Under the terms of the trust, the trustee may not be permitted to make payments or distributions that might interfere with government benefit eligibility (e.g., distributions cannot be made directly to the beneficiary).

• Special needs trusts may be established as part of a will (known as a testamentary trust) or during the creator’s lifetime (known as a living or inter vivos trust).

• Special needs trusts can hold an unlimited amount of funds and can be added to at any time.

What types of Special Needs Trusts are available?

Primarily all SNTs fall under one of two categories:

The Third-Party SNT is established with funds that belong to someone other than the beneficiary.  A parent or grandparent may create such a trust in lifetime or under a will and fund it with a gift of cash, life insurance, or another asset. Upon the death of the beneficiary, any assets that remain in the trust can be distributed to whoever has been designated.  When the third-party trust is properly drafted, the state will not have to be “paid back” Medicaid services when the beneficiary dies.

A First Party or Self-Settled SNT is established with funds owned by the person with disabilities. Most commonly these funds come from a personal injury award or inheritance.  But some people have accumulated wealth before their disability occurs, and they can protect their own assets in this way. This kind of trust is created for the sole benefit of an individual who is disabled and who is under age 65 at the time the trust is established. Upon the beneficiary’s death, Medicaid must be “paid back” from the trust assets for any Medicaid care provided. If assets still remain after reimbursement, they can be paid to beneficiaries.

Another type of First Party or Self-Settled SNT is the qualified pooled trust. This kind of trust is established and managed by a nonprofit organization. Separate accounts are maintained for each trust beneficiary, but funds are pooled for investment and management purposes. Upon the beneficiary’s death, the nonprofit organization normally receives assets remaining in the trust, often without a need to reimburse Medicaid for benefits paid to the beneficiary.  In some cases, surviving family members may be entitled to receive some or all of the remaining funds, but only after Medicaid reimbursement.

You can see this process in complicated and cumbersome, but in the right situation, it may be preferable to any other alternative.  The time you spend with your advisor and their team can help you reach your goals if this situation arises and will give you incredible piece of mind.