A special needs trust provides for an individual’s supplemental needs without disqualifying the person from benefits, including Medicaid benefits, Supplemental Security Income (SSI), public benefits, and other government benefits that are part of their long term care plan. As you probably already know, a trust is a fiduciary agreement that allows a third party or trustee to hold trust assets on behalf of a beneficiary.
Trusts are used in many ways and can specify exactly how and when the assets pass to beneficiaries. Establishing a special needs trust, which is also referred to as a supplemental needs trust can be very helpful. When properly drafted, it helps a person with disabilities keep whichever benefits they may be receiving such as those we mentioned in the opening paragraph: Medicaid benefits, Supplemental Security Income (SSI), other government benefits, and public benefits received for their sole benefit (even if there is a legal guardian, such as a family member, who receives it or manages it on their behalf). In other words, it keeps a nest egg of assets for the person’s long term care 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.
There are essentially three types of special needs trusts: a first-party trust, a third-party trust, and a pooled trust. Each has its own purpose. In this section, we will explain their individual purposes. Choosing the appropriate type of special needs trust for a person with disabilities depends on their long term care plan. Schedule a free consultation with the special needs planners of Ball Morse Lowe now.
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 trust 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 instead of funding the trust, the beneficiary could be disqualified from receiving government benefits. A first-party special needs trust must include repayment language directing that upon the beneficiary’s death, the remaining trust 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, such as a legal guardian, for the benefit of the person with disabilities receiving benefits. The third-party, such as a uses their own assets for the purpose of funding the trust. If a person with disabilities 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, including Supplemental Security Income (SSI), 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.
A pooled trust is a special needs trust involving the use of "accounts" that represent contributions to the funding of the trust. The original intention of this type of special needs trust is to help in situations where people with disabilities who have excess assets and when establishing a first-party or third-party trust may seem like the wrong option because it is prohibitively expensive, time-consuming, or overly complicated.
Do I need a Trust or Will?
One of the most important and most difficult decisions in establishing 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 or a non-profit organization is typically the best option. If a corporate trustee or non-profit organization is used, a family member, legal guardian, or friend can be appointed to serve as co-trustee with them. A friend, legal guardian, or family member can assist the trustee in understanding the unique daily needs of the beneficiary.
There are many reasons to establish a special needs 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 that depends on the needs of the person with disabilities and their long term care.
To make certain everything goes properly, we recommend working with a
lawyer to ensure that your special needs trust is properly drafted.
If you’d like to talk about the process of setting up a special needs trust, please contact us today to schedule your free consultation! The special needs planners of Ball Morse Lowe understand the unique and often complicated laws involved both in estate planning and special needs laws. Schedule your free consultation now!