What is a Special Needs Trust?
A “special needs trust” is a specific type of trust that is established for a person with special needs to supplement the benefits the person with special needs may receive from government programs such a SSI and Medicaid. A properly drafted special needs trust will allow the beneficiary to receive these government benefits while still receiving financial assistance from the trust.
A trust is an agreement that establishes a relationship between three parties — a donor, who supplies the funds for the trust; a trustee, who agrees to hold and administer the funds according to the directions set forth in the trust; and a beneficiary or beneficiaries who receive the benefit of the funds. Typically, the donor’s wishes for use of the funds to assist the disabled person are spelled out in the trust, providing the trustee with instructions about how to use the trust assets to supplement the government benefits. By establishing a special needs trust, the donor can provide for the disabled person, often long after the donor has passed away.
There are three main types of special needs trusts. In each case, the person with special needs is the beneficiary of the trust. A “first-party” special needs trust holds assets that belong to the person with special needs, such as an inheritance or an accident settlement. A “third-party” special needs trust holds funds belonging to a parent or other person who wants to help the disabled individual. A so-called “pooled trust” holds funds for the benefit of multiple beneficiaries with special needs.
Supplemental Security Income (SSI) is a program of the federal Social Security Administration that pays monthly benefits to people with limited income and resources who are disabled, blind, or age 65 or older. Blind or disabled children may also get SSI. SSI is needs based, so applicants are limited in what they may own or earn. In order to qualify for SSI, an applicant’s assets may not exceed $2,000. If an SSI participant should come into a sum of money because of inheritance or accident recovery, he can continue to qualify if he establishes a first-party special needs trust with the money. While the beneficiary is living, the funds in the trust are used for his benefit, and when he dies, any assets remaining in the trust are used to reimburse the government for the cost of his medical care. These trusts are especially useful for beneficiaries who are receiving SSI and Medicaid and come into large amounts of money, because the trust allows the beneficiary to retain his benefits while still being able to use the funds for his supplemental needs.
The third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold any kind of asset belonging to the family member or other individual, including a house, stocks, bonds, and other types of investments. The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect the beneficiary’s access to government benefits, and the funds can be used to pay for the beneficiary’s supplemental needs beyond those covered by the government programs. An advantage of the third-party special needs trust is that there is no “payback” provision as found in first-party trusts. This means that when the beneficiary with special needs dies, any funds remaining in her trust can pass to other family members, or to charity, without having to be used to reimburse the government.
The third type of special needs trust is the pooled trust, which is set up by a nonprofit to allow beneficiaries to pool their resources for management purposes, while still maintaining separate accounts for each beneficiary’s needs. When the beneficiary dies, the funds remaining in her account reimburse the government for her care, but a portion also goes towards the non-profit organization responsible for managing the trust.
An interesting sidelight is that a person who is attempting to qualify for long-term care coverage through Medicaid can transfer their assets into a properly drafted third-party special needs trust for the benefit of a person with disabilities without incurring a transfer-of-assets penalty, allowing the donor to qualify for Medicaid while assuring that the trust beneficiary is taken care of in the future.
This is an area where mistakes in planning can be disastrous for the disabled person, who can lose benefits if a mistake is made in the creation or administration of the special needs trust. As in most areas of estate planning, it is wise to consult a trusted advisor before embarking upon this path.