Special Needs Trust

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A trust is an estate planning tool created to manage an individual’s assets for the benefit of others. A special needs trust is a unique type of trust which enables a mentally or physically disabled, or chronically ill person, to receive certain income without negatively affecting his eligibility for needs-based public assistance. These government assistance programs include, among others, Social Security Disability, Supplemental Security Income, Medicare, and Medicaid. Assets held in a special needs trust are not counted for the purpose of qualifying for these programs. To explore this concept, consider the following special needs trust definition.

Definition of Special Needs Trust

Noun

  1. A trust intended to aid a special needs individual, while preserving his eligibility for needs-based government programs, such as Supplemental Security Income and Medicaid.

Origin

1993     United States Code §42 (42 USC 1396p(d)(4), and 42 USC1382b(e)(5))

What is a Special Needs Trust

When an individual with special needs applies for public assistance programs, such as Social Security Disability, Medicare, Medicaid, and Food Stamps, their eligibility is determined based on his available assets and income. Even if the special needs individual receives some assistance from family, there are certain benefits that would be otherwise unavailable if the individual was unable to receive Medicaid and other programs. For example, Medicaid is the only program that pays for long-term nursing care for physically disabled individuals.

When a special needs trust is set up, certain assets are transferred into it to be managed by the named Trustee for the benefit of the disabled individual. Because the assets are owned by the trust, and not the beneficiary, he can maintain his eligibility for needs-based assistance. The trustee then uses funds from the trust to pay for needs not covered by the assistance programs, such as costs for sitters or companions, and medical, dental, and prescription costs not covered by Medicare or Medicaid.

There are two primary types of special needs trust (“SNT”), the first party SNT, and a third party SNT.

First Party Special Needs Trust

A first party SNT, sometimes referred to as a “self-settled SNT,” contains assets or income that belong to the individual with the disability, who is also the “beneficiary.” In order for a first party SNT to not be countable toward Medicaid and SSI eligibility, it must have been formed and funded while the beneficiary was under the age of 65. The trust must be irrevocable, with a trustee who is not the beneficiary, and must contain a provision to reimburse Medicaid upon the death of the beneficiary, or upon termination of the trust, whichever happens first. Funding for such a trust often comes from an inheritance, or from a cash settlement on a personal injury or other lawsuit.

For example:

Arnold experiences a rock climbing accident in which he sustains a permanent traumatic brain injury. While Arnold can make important decisions on his own, he requires extensive physical care on a daily basis, and his family has helped him apply for Social Security Disability benefits, as well as Medicare and Medicaid to help cover his medical expenses. Arnold had previously received a $200,000 inheritance from his grandfather, which he puts into an irrevocable first party special needs trust, naming his mother, Dorothy, as Trustee.

Dorothy uses funds from the trust to pay expenses of Arnold’s care and extraordinary daily living expenses. When Arnold passes away, or becomes well enough to be able to terminate the trust, any proceeds remaining in the trust must be used to pay back Medicaid.

Third Party Special Needs Trust

A third party SNT, sometimes referred to as a “supplemental needs trust,” is funded solely by assets belonging to someone other than the beneficiary. Funding for a third party SNT often comes from inheritance or gifts from parents or grandparents, or proceeds of a life insurance policy paid directly to the trust. While assets for this type of trust cannot come from the beneficiary, the third party SNT is popular because there is no Medicaid pay-back provision. When the beneficiary dies, or the trust is otherwise terminated, the creator of the trust (the “Trustor”) specifies how the remaining proceeds of the trust are to be distributed.

For example:

Lillian is born with a debilitating physical condition for which she will need specialized care throughout her life. Lillian’s parents have no extraordinary resources to pay for such care, and apply for government assistance to help support their little girl. Lillian’s grandmother withdraws a large sum of money from her own trust, depositing $150,000 into a third party special needs trust to benefit Lillian, and makes the trust the sole beneficiary of her $500,000 life insurance policy.

Lillian’s parents are named as co-trustees to enable them to manage the trust, and use the proceeds to pay for Lillian’s care, including help with daily life activities, special furnishings or equipment, and medical costs not covered by Medicare or Medicaid. When Lillian passes away, there is no requirement to repay Medicaid. Instead, the trustees, Lillian’s parents, decide how any assets remaining in the trust are to be distributed.

Special Needs Trust Form

An individual considering creating a special needs trust may be able to obtain a special needs trust form from an attorney, or from certain online sources. Such forms are not common, however, as most SNTs are written by attorneys. This is because the language of an SNT is complex, and must be precise. Each SNT must be personalized to the needs of the beneficiary. There are some circumstances, however, in which an individual may still want to use a special needs trust form.

  1. Third Party SNT – a third party trust funded solely by an inheritance or gift from someone other than the disabled individual is more easily characterized as being non-countable as income for the purposes of public benefits.
  2. Time and Effort – the individual creating the SNT must be willing to put in the time and effort required to research and understand the process, and to follow instructions for a special needs trust form carefully.
  3. Unable to Hire an Attorney – attorney’s fees can be steep, making it impossible for a family to hire a qualified lawyer to create an SNT.

Related Legal Terms and Issues

  • Assets – Property or finances owned by an individual or entity, and regarded as having value.
  • Beneficiary – A person designated as the recipient of property or other assets as specified in a will, trust, or insurance policy.
  • Estate Planning – The process by which an individual arranges transfer or management of his assets in anticipation of death.
  • Trustee – A person or entity nominated to mange assets set aside to benefit another person.
  • Trustor – The creator of a trust.