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The Basics: Special Needs Trusts

Posted by Mary R. LaSota, Esquire in Estate Plan, Special Needs Trusts | 1 comments

(Part One in a series of blogs covering special needs trusts)

When most individuals think of estate planning, they typically think about creating a Will that stipulates how their property and monies are to be allocated after their death.  Estate planning is actually a complex legal process, and writing a Will is just a small part of it.

Every individual’s estate plan is different and will be based on their individual needs, wishes and assets.  If a family has a loved one who is physically, mentally or developmentally incapacitated, the family needs to determine how best to allocate their resources for the care of the incapacitated member not only during their lives, but also after their deaths.  This continued care can be achieved by establishing a Special Needs Trust.

What is a Special Needs Trust?

A Special Needs Trust (SNT) is a legally binding document that specifies the financial plan for protecting the health and well-being of a loved one with a disability.  There are two general kinds of Special Needs Trusts; a general support SNT and a supplemental SNT.  The vast majority of Special Needs Trusts are supplemental, designed to serve as a secondary source of benefits for the beneficiary when government benefits fail to meet the beneficiary’s needs. A properly drafted supplemental SNT will will not disqualify a beneficiary from need-based benefits (SSDI and Medical Assistance) since the assets held by the trust are not considered “available resources.”

In contrasts, a General Support SNT is usually the only source of benefits for the beneficiary and assets held by that trust are considered “available resources” and will preclude a beneficiary from qualifying for need-based benefits.   However, the General Support SNT likely contains more than sufficient assets to care for the disabled beneficiary for the rest of her life.

When planning for a disabled individual consider carefully if the resources available to the disabled beneficiary will fully cover the support and care during the beneficiary’s lifetime.

Purpose of the Supplemental Special Needs Trust

The main purpose of a Supplemental SNT is to enhance the beneficiary’s life by disbursing funds for the beneficiary’s care and daily living needs without affecting their eligibility for public benefits.  Many disabled individuals receive Social Security Income (SSI) or Supplemental Security Disability Insurance (SSDI) and/or health insurance benefits in the form of Medicare or Medicaid. Some of these programs limit the amount of income a disabled person can receive, so leaving the individual an inheritance can have serious negative consequences on their public benefits.

If structured properly, the funds from a Supplemental SNT should not affect public benefits’ eligibility rather it will fill in the gaps and supplement the basic support and care that the disabled beneficiary needs. The trust may be used to pay for additional expenditures such as:

  • Vacation or recreational activities
  • Hobbies
  • Education
  • Attorney fees, accountants, and other professional services
  • Service animal needs
  • Vocational training
  • Rehabilitation equipment or assisted living devices not covered under public assistance
  • Domestic and personal assistants
  • Attendant and respite care
  • Customized, accessible vehicle

Setting up a Supplemental SNT ensures that the disabled family member will enjoy the same lifestyle as they did prior to their benefactor’s demise.

Types and Examples of Trusts

Supplemental SNT can either be funded by the disabled individual or a third party.  Those trusts funded by the disabled individual are commonly known as a First Party Trust or Self-Funded Trust. These types of trusts require compliance with federal law, 42 U.S.C. §1396p (d)(4)(A) or (d)(4)(C), Pennsylvania statutory law, 62 P.S. §1414 and are subject to approval in accordance with the regulations set by the Department of Public Welfare’s Office of General Counsel.  Alternatively, trusts funded by a grandparent, parent or another party are known as Third Party Funded Trusts and do not require compliance with federal law.  The appropriate one is determined by individual circumstances.

First Party Special Needs Trusts

If the SNT is self-funded by the disabled beneficiary, federal law requires that the SNT provide for a payback or reimbursement provision to Medicaid (or other government medical providers). The beneficiary must be “disabled” with the meaning of the Social Security Act and must be under age 65 when the SNT is established.

Pooled Special Needs Trusts

If the disabled beneficiary is over age 65, the beneficiary’s only option under federal law is a Pooled Trust.  The disabled individual can establish the trust, but a non-profit organization must serve as a trustee.  The non-profit organization manages the trust for its members, with a separate account for each individual, and all resources are pooled together to allow for maximum investment opportunities. Unlike a First-Party SNT no payback provision is required, however, any funds remaining in the trust at the beneficiary’s must remain in the Pooled Trust for the benefit of other disabled beneficiaries.

Third Party Funded SNT

A Third Party Funded SNT can be established by a benefactor (often a family member) with their own money and/or assets.  These funds can be used to supplement or augment the needs that are not covered by public benefits.   Properly drafted and managed a Supplemental SNT can hold an unlimited amount of assets without those assets ever being considered “available resources” thereby disqualifying the beneficiary from receiving public benefits.  Another advantage of the third party trust is that the money never actually belongs to the beneficiary, thus none of it is subject to a payback provision when the beneficiary dies.  Instead, the money can be left to remaining family members.

Failure to Use a Trust

Usually, estate planning is planning for death or end-of-life events.   Families with disabled individuals cannot afford to wait for end-of-life events rather those families should be planning for the life of the disabled individual – life planning.   Special Needs Trusts are tools that can be used to preserve assets and income without the loss of public benefits.  Furthermore, a properly designed Special Needs Trust can promote the disabled beneficiary’s skills, enhance their life and independence.

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