If you are caring for a family member with a disability, a special needs trust (also called a supplemental needs trust) can be an important planning tool to help provide for your loved one. When an individual with a disability receives financial support from public benefits such as Supplemental Security Income (SSI) or Medicaid, there are strict income and resource limits for that individual. An inheritance, a legal settlement or even a large gift can push that individual over the limits and disqualify them for public benefits. Transferring those assets that the individual receives to a special needs trust preserves their eligibility for public benefits while also setting aside funds to enhance their quality of life by paying for expenses not covered by public benefits such as education, private nursing care, insurance, eyeglasses, hearing aids, dentures, assistive technology, and other personal items.
There are three basic types of special needs trusts: first-party special needs trusts, third-party special needs trusts and pooled trusts. First-party trusts are established with the beneficiary’s own assets. Prior to 2016, only a parent, grandparent or court could establish these trusts, but now the individual with a disability may establish the trust themself. These types of trusts are often used when the person with a disability receives a legal settlement (e.g., personal injury) or an inheritance. The beneficiary must be under the age of 65 to establish a first-party trust, and the trust must be irrevocable and include a Medicaid payback provision that reimburses the state for benefits provided to the beneficiary. Third-party trusts are established and funded by someone other than the person with a disability, typically parents, grandparents, or other family members. A third-party trust may be established through usual estate planning tools such as wills and trusts by including special needs trust provisions in those documents. No Medicaid payback provision is required. Finally, a pooled trust is a trust managed by a non-profit organization that pools resources from multiple beneficiaries for investment purposes yet maintains a separate account for each beneficiary. Pooled trusts are a good option for a disabled individual who might receive a smaller amount of money, since administration costs are usually lower than other types of special needs trusts.
The role of trustee in a special needs trust is especially important as that person or institution must follow the rules of each state and/or benefit program when making distributions to the beneficiary in order to avoid disrupting benefits for that beneficiary. It is important to choose a trustee who knows and understands the applicable rules. In addition, it is important to choose an attorney to draft the special needs trust who understands the provisions that must be included such as a Medicaid payback provision (if required) and language that distributions to the beneficiary may only “supplement” and not replace government benefits.
Special Needs Trusts are an important planning tool for individuals with disabilities and their families. In the next newsletter, we will explore how you can incorporate a special needs trust into your estate plan and also explore how these trusts can work together with ABLE accounts to provide financial security for your loved one.
