8 Important Things to Know When Setting Up a Special Needs Trust

Many families have children, grandchildren, or relatives with special needs. Special needs include permanent mental or learning disorders, physical impairments like paralysis, blindness, or deafness.

1. What Are Special Needs Trusts For?

Many public assistance programs are subject to so-called means-testing. That is, the government makes certain assistance payments to people who can’t afford to meet their needs. That includes assistance disability benefits provided by Social Security. All of a beneficiary’s sources of income and assets are considered in determining a persons’ ability to meet his or her needs, including special needs.

Impaired kids or others with special needs can receive some kind of government assistance like Medicaid. But their parents or others want to supplement their support. Such third-party support could reduce or eliminate government special needs support under the applicable means test.

But the law provides that either the beneficiary or third parties can set up a special needs trust for the special needs beneficiary. Payments from those qualified special needs trusts will not be included as the beneficiary’s sources of income or assets for purposes of the means-testing for public support that the beneficiary receives.

There are two kinds of special needs trusts (SNT). A first-party SNT is funded by the beneficiary. A third-party SNT is funded by someone other than the special needs beneficiary.

2. Third-Party Special Needs Trust

Third-party SNTs are used to support a child or other persons with special needs. Usually, the third party is a parent, but it can include grandparents, a sibling, or another third-party.

A third-party SNT is established by the benefactor’s will or by an inter vivos trust during their lifetime. They can also be created by a stand-alone SNT instrument.

A stand-alone SNT is funded from the day it is created. The funding can come from the trust grantor (creator) during their lifetime, as well as gifts from grandparents and family friends.

3. Revocability of Third-Party SNT

A third-party SNT can be revocable. However, if the SNT beneficiary can revoke it there could be two negative consequences.

  • The SNTs assets would be treated as resources available to the beneficiary for purposes of Security Income (SSI) and Medicaid eligibility.
  • It may make the SNT beneficiary ineligible for other public benefits that have a means test (income or asset limits)

The SNT instrument should provide that the creator of the trust or the trustee can amend the instrument in response to any law changes or the SNY beneficiary’s circumstances, or agency challenges, as required to preserve the beneficiary’s qualification for public assistance.

4. Distribution of Third-Party SNT Assets

Upon the death of the SNT beneficiary, a third-party SNT will be dissolved and the assets will be distributed as provided in the SNT instrument.

5. First-Party SNTs

A first-party SNT is set up by the disabled person (SNT beneficiary). For example, a disabled person might set up an SNT if they receive a court settlement or inherit valuable assets. Or they might have income-producing property before they become disabled. Those sources of support would be taken into account for means-testing.

Those first-party SNT established by the beneficiary are sanctioned since 2016 by federal law 42 U.S.C.§1396p(d)(4)(A). A first-party SNT’s assets can be used only for “disabled” persons as defined by statute and those who are under 65 years old.

6. Pooled Special Need Trusts

Some but not all states allow people over 65 years old to transfer SNT assets to a pooled SNT. Pooled SNT’s are subject to special rules. Moreover, they are not allowed by most states. You should consult your trust advisor about the availability and suitability of a pooled SNT.

7. Distributions of First-Party SNT Assets

Unlike a third-person SNT, the law dictates how first-party SNT assets are distributed upon the death of the beneficiary and dissolution of the trust. The instrument must require that the trust assets, to the extent thereof, must first be paid to reimburse the state Medicaid program for total medical benefits paid by the state Medicaid program for the SNT beneficiary’s assistance during their lifetime.

8. Get the Best Trust Depository

The SNT trust assets must be held in a safe depository and source for paying out trust benefits to and on behalf of the SNT beneficiary. Evolve has support services, investment models and advisors, and administrative, support, and computer systems required to efficiently manage your SNT trust.