Do I Need a Special Needs Trust for My Loved One?

by Ball Morse Lowe on May 29, 2019


As you probably already know, a trust is a fiduciary agreement that allows a third party or trustee to hold assets on behalf of a beneficiary. Trusts are used in many ways and can specify exactly how and when the assets pass to beneficiaries. One type of trust that is especially useful is a special needs trust, also referred to as a supplemental needs trust.  A special needs trust is useful for beneficiaries who are receiving or may receive Medicaid or other state/federal benefits.  A special needs trust provides for an individual’s supplemental needs without disqualifying the person from benefits. In other words, it keeps a nest egg of assets for the person’s future needs and keeps the person qualified for government benefits. Supplemental needs are needs or benefits other than those being provided by the government.  For example, supplemental needs might include expenses for televisions, cell phones, pre-paid funeral arrangements, personal care items and vacations.   

Different Types of Special Needs Trusts

A first party trust, also known as a “(d)(4)(A) trust” or “Medicaid Pay-Back Trust” is a trust funded with the beneficiary’s own assets. These assets might be from a personal injury award, an inheritance or life insurance proceeds.  If the person receiving benefits were to directly receive these assets, the beneficiary could be disqualified from receiving governmental benefits. A first party special needs trust must include repayment language directing that upon the beneficiary’s death, the remaining assets must be returned to the state up to an amount equal to the amount the state paid on behalf of the individual.

A third party special needs trust is established by a parent or another third party for the benefit of a person receiving benefits.  The third party uses his/her own assets to fund the trust.  If a person is currently receiving benefits, a standalone trust can be established to ensure the person will continue receiving benefits.  Another way to establish a third party trust is through an estate plan.  For example, parents setting up a revocable living trust for themselves can include provisions for establishing a third party trust in the event a beneficiary is receiving government benefits at the time of distribution.  This protects the beneficiary’s ability to receive government benefits.  Unlike a first party trust, third party trusts do not have to contain repayment language.

Selecting a Trustee

One of the most important and hardest decisions in designing a special needs trust is choosing a trustee. The trustee of a special needs trust has sole discretion in making distributions to the beneficiary.  If distributions are made for “support” and not supplemental needs, the beneficiary could be disqualified from benefits.  Choosing a corporate trustee is typically the best option. If a corporate trustee is used, a family member or friend can be appointed to serve as co-trustee with the corporate trustee.  The friend or family member can assist the corporate trustee in understanding the unique daily needs of the beneficiary.

In Summary

There are plenty of different reasons to set up a trust either for yourself or a loved one. In many cases when someone sets up a first party or third party special needs trust, it is to ensure that the person receiving government benefits is not disqualified from receiving them. Setting up and administering a special needs trust is a complex process. To make certain everything goes properly, we recommend working with a lawyer to set up your trust.

If you’d like to talk about the process of setting up a special needs trust, please contact us today!

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Topics: Trusts