This Post is About…
This post is about Special Needs Trusts. It has basic information on what a special needs trust is, how to set up a special needs trust, resources for special needs trusts and more.
This was written in the spirit of sharing information, parent-to-parent; please consult your lawyer and the appropriate professionals as you move forward and set up your special needs trust!
Special Needs Trusts and Parents of Kids with Disabilities
If you have a child with a disability – or if you have a disability yourself – special needs trusts have probably been on your radar for a while. I know they have for me… the thing is, what with Social Security income and asset limitations, figuring out how to make sure my child is financially secure after I’m gone is important to me.
But Special Needs Trusts are not easy to understand. Hence…this post. So, let’s get started – you’ll see all of what this post covers in the table of contents below – you can jump to each section by clicking on the link. Hope that makes it a little easier to find the information you are looking for.
What IS a Special Needs Trust (SNT)?
A special needs trust (SNT) is a legal arrangement in which assets are held on behalf of a disabled person without affecting that person’s eligibility for means-tested public benefits such as Medicaid or Supplemental Security Income (SSI). While assets held by the trust are not “countable” toward qualification for such programs, there are strict regulations regarding disbursements from SNTs, which are meant to supplement the funds and services available through government programs.
Who can establish and manage a Special Needs Trust?
The establishment of the SNT depends on the type of SNT being opened. A first party SNT, which a beneficiary funds with their own assets, may be established by the beneficiary themselves, their parents, their grandparents, a conservator/guardian, or the court. Anyone other than the beneficiary may establish a third party SNT. Designated trustees always manage both types of SNTs. See below for more information about each type, as well as about pooled SNTs, which may be more cost-effective for some individuals.
What are the responsibilities of the trustee?
The trustee is responsible for investing and disbursing funds, paying taxes, and maintaining detailed accounts. The trustee must have an understanding of government programs, including strict regulations concerning the use of SNT assets, since improper use of funds can disqualify the beneficiary from benefits like Medicaid or SSI. In addition, the trustee should have a deep appreciation for the beneficiary’s needs and desires so that the trust will make the best possible contribution to the beneficiary’s quality of life. The trustee has a fiduciary responsibility to act in the best interests of the beneficiary at all times, and all SNT funds must be used for the sole benefit of the beneficiary.
What is a first party Special Needs Trust?
A first party SNT is created with assets belonging to the beneficiary themselves. The beneficiary must be under 65 years of age at the time the trust is established. Funds remaining in the trust at the beneficiary’s death must be used to reimburse Medicaid for services provided to the beneficiary during their lifetime, before any remaining funds can be distributed to anyone else. This is referred to as Medicaid payback (see below.)
What is a third party Special Needs Trust?
A third party Special Needs Trust is created with assets provided by anyone other than the beneficiary, such as parents, other relatives, or the beneficiary’s friends. There is no age requirement for a third party SNT to be established. Also, residual third party SNT funds are not subject to Medicaid payback upon the beneficiary’s death, and “remainder” beneficiaries may be named to receive any assets left in the original beneficiary’s trust.
What is a pooled Special Needs Trust?
A pooled SNT consists of sub-accounts belonging to many beneficiaries which are managed as a single entity, usually by nonprofit corporations that use the services of social workers, money managers, and special needs attorneys. Since many financial institutions do not handle small SNTs, or charge fees that are not cost-effective for modest trusts, pooled SNTs can give families access to highly skilled trustees. Funds remaining in a pooled SNT at the time of the beneficiary’s death are typically divided between Medicaid and the non-profit. See below for information about non-profit organizations that manage pooled SNTs.
What are the regulations regarding the use of Special Needs Trust funds?
While there are no limits to how many SNTs an individual may have or to how much each SNT may hold, any SNT funds must be used for the benefit of the beneficiary alone, without affecting the beneficiary’s eligibility for Medicaid, SSI, or other government programs. Important to note is that food and housing, which the Social Security Administration (SSA) considers in-kind support, will reduce a beneficiary’s payments from SSI in the event that SNT funds are used to cover them.
How much does a Special Needs Trust cost?
The creation and maintenance of a SNT incurs attorney and trustee fees. A less expensive pooled SNT may be appropriate in cases where the estate is small or it is difficult to identify a trustee.
What are the tax implications of a Special Needs Trust?
First party SNTs are generally treated as grantor trusts, with income taxable to the beneficiary. Often the income generated will be below taxable limits. With proper drafting, third party SNTs can use various planning strategies to minimize taxes.
Are Special Needs Trust funds always subject to Medicaid payback?
Funds remaining in a first party SNT are subject to Medicaid payback for services performed throughout the beneficiary’s life. There is no payback required from third party SNTs.
Where Can I Get Help Establishing a Special Needs Trust?
You can hire a special needs attorney in your state for support establishing a SNT: https://www.specialneedsalliance.org/find-an-attorney/
If you are considering a pooled SNT, your special needs attorney can help you identify a reputable nonprofit that administers this kind of SNT: https://www.specialneedsalliance.org/the-voice/nonprofit-organizations-as-trustees-of-special-needs-trusts-2/
In many states and local areas The Arc offers a Master Pooled Trust to help families with affordable administration of SNTs: https://thearcalliance.org/how-a-trust-can-help/
Kari Turner is a freelance writer and disability advocate from Los Angeles. She and her husband are raising their family in California’s high desert. In her spare time, of which she’s had little since her daughters were born!, she blogs about disability, spirituality, parenting, and faith at http://writingthetao.blogspot.com. Follow her on Facebook and LinkedIn.