Whether you have a minor or adult disabled child, are an adult who recently became disabled, or simply want to be prepared for the unexpected, your estate plan should include special needs planning. One of the most important aspects of this planning is creating a special needs trust (also called a supplemental needs trust, or SNT) for your loved one.
Wondering why special needs trusts are so important and how they work? Want to know how to set up a special needs trust for disabled adults or children? We’ve got answers to some of the most frequently asked questions.
What is a special needs trust?
A special needs trust is a specific type of trust designed to allow the disabled beneficiary to benefit from trust assets while maintaining their current and future eligibility for needs-based public assistance like Medicaid and SSI.
How do special needs trusts protect the disabled beneficiary’s eligibility for benefits?
Needs-based public assistance programs like Medicaid and SSI have very strict income and resource requirements. Exceed those limits, and benefits will be terminated until the money is spent. For someone who is disabled, an outright inheritance or settlement from a lawsuit would cause them to immediately lose those benefits.
A properly drafted special needs trust, however, maintains the beneficiary’s eligibility for these programs while still allowing them to benefit from the trust’s assets. The trust owns the assets, so they aren’t considered the beneficiary’s income or resources. However, the trustees (the person or persons who administer the trust) make distributions on the beneficiary’s behalf, so they still indirectly benefit from the assets.
Are all special needs trusts the same?
Yes and no. All special needs trusts serve the same purpose and operate in the same basic manner, i.e., they hold trust assets for the benefit of the disabled beneficiary and distribute assets on their behalf. However, how the trust is funded and how any remaining assets are distributed at the beneficiary’s death depends on who creates it.
What are the different types of trusts?
There are two different types of special needs trusts.
The first is a self-settled trust, also known as a first-person or Medicaid payback trust. The disabled person (or their representative) creates a self-settled trust and funds it with proceeds from a lawsuit. No other assets can be added to the trust. Self-settled trusts must include a Medicaid payback provision, which allows Medicaid, at the beneficiary’s death, to be reimbursed for any benefits it provided during the beneficiary’s lifetime. Any assets remaining after Medicaid has been reimbursed are distributed according to the trust.
A third-party special needs trust is created by a third-party, typically parents or grandparents, to hold lifetime gifts or inheritances for the disabled beneficiary. It can be created as a standalone document (in which case it can be funded immediately) or created in a will or revocable living trust. Unlike first-party trusts, the third-party SNT does not have a Medicaid payback provision. At the beneficiary’s death, any remaining trust assets will be distributed as outlined in the trust agreement.
How are distributions made?
To protect the disabled beneficiary’s eligibility for needs-based public assistance, distributions from a special needs trust are made on their behalf – never to them directly. For example, if the beneficiary needed a car, the trust would purchase it rather than distribute funds to the beneficiary so they can buy it.
What can trust funds be used for?
Non-special needs trusts typically give trustees the power to make distributions for the beneficiary’s health, education, maintenance, and support (known as the HEMS standard), or other reasons the trustee deems appropriate. Special needs trusts cannot include the HEMS standard; allowing the trust to pay for the beneficiary’s medical care would supplant the need for Medicaid and render the beneficiary ineligible. That’s why we say SNT distributions are meant to supplement other benefits the beneficiary may receive, but never supplant them. Distributions from special needs trusts are typically made to pay for not covered by needs-based public assistance but would enhance the beneficiary’s quality of life, such as vacations, tickets to the theater, a cell phone, etc.
Can I set up a special needs trust in my will?
Yes, and many parents do so. But it isn’t always the best option. Why? A trust created in your will only comes into existence at your death. But what if another person, like a grandparent, wants to leave your child something or even make gifts to them during their lifetime? Without a trust already established, these well-meaning people may leave the inheritance outright to the disabled individual, causing them to lose benefits. The better option is to create a standalone special needs trust that people can leave gifts to immediately.
Can the beneficiary decide who gets the trust’s remaining assets when they die?
To some extent, yes. In a self-settled trust, Medicaid will be the first to receive any of the trust’s remaining assets, so there may be nothing left after they are reimbursed for benefits paid during the beneficiary’s lifetime. However, for beneficiaries of a third-party trust, or if there is anything left in a self-settled trust, the trust can give the beneficiary the power to distribute assets via a limited power of appointment. The limited power of appointment gives the beneficiary the power to name, in their will, one or more individuals or charitable organizations to receive the remaining trust assets at their death.
Do I need to hire a special needs trust attorney?
Trusts can be very complicated, and special needs trusts even more so. They require knowledge not just of trusts and estate planning, but also of the rules and regulations regarding Medicaid, SSI, and other needs-based public assistance. An improperly drafted trust can cause the beneficiary to become ineligible for these benefits – the exact opposite of your intent.
The Good Law Group
The special needs trust attorneys at The Good Law Group have experience with SSI, Medicaid, and trusts and estates planning and can help you draft a trust that meets your needs and protects the beneficiary’s eligibility for public benefits programs. Call us at 847-577-4476 to schedule a consultation.