Special Needs Trusts in the Estate Planning World
Special Needs Trusts, or Supplemental Needs Trusts (“SNT”), as they are often called, are estate planning options which are primarily used to shelter resources for persons with disabilities to improve their quality of life and to allow the disabled person to continue to receive government benefits, despite the fact that they have assets in their SNT.
There are several categories of Special Need Trusts that can be created under federal law depending upon whose money will be funded into the SNT. §42 U.S.C. §1396p(d)(4)(A) allows the creation of an SNT which is self-settled and thus, funded with assets belonging to the disabled person. In order for an SNT to qualify as a “First Party” or “Self-Settled” Trust, the disabled person must be the sole beneficiary of the SNT, and the Grantor or Creator cannot be the Trustee of the SNT. More importantly, a First Party Special Needs Trust must contain a “payback clause” to pay back to Medicaid all funds held in trust as of the disabled individual’s death for costs paid out by Medicaid for the benefit of the disabled individual from the date of the creation of the SNT. First Party SNTs are frequently used in personal injury cases or when inheritance or assets pass directly to a disabled person. The primary limitation on a First Party SNT is that this type of Trust must be established and funded prior to the disabled individual attaining the age of sixty-five (65). Accordingly, this type of SNT cannot be created via testamentary trust and the beneficiary of the Trust must meet the definition of “disabled” as defined by the Social Security Administration.
In contrast, a Third Party Special Needs Trust is an SNT that is established by any person other than the disabled person. A Third Party SNT is funded with third party assets, meaning assets belonging to any person other than the disabled individual. Because a Third Party SNT is funded with assets belonging to any person than the disabled person, there is no sole beneficiary requirement and there is no requirement that a “payback clause” be included in a Third Party SNT. Because the Grantor is someone other than the disabled person, the Grantor of a Third Party SNT is allowed to serve as Trustee. As noted above, distributions can be made to third parties other than the disabled person and because there is no payback clause, then as of the disabled individual’s death the remaining assets can pass as the Grantor selects.
A Third-Party Special Needs Trust can be created via Will or under a Revocable Trust. Effective estate planning in the special needs world means that families who have disabled beneficiaries set up their estate plan in advance to establish a Third Party SNT for the benefit of the disabled beneficiary rather than failing to plan such that their assets pass in trust under standard trust language allowing for distributions for the beneficiary’s “health, education, maintenance and support” (the “HEMS” standard) or directly to the disabled beneficiary—both of which will cause a disruption in the disabled individual’s benefits and will result in a situation where crisis planning must be done to set up a First Party SNT for the disabled individual.
The final type of Special Needs Trust is the “Pooled Trust” option which is allowed under §42 U.S.C. §1396p(d)(4)(C). This Code section allows a public charity to set up or create a “Pooled” Trust to hold assets for the benefit of a disabled individual. The advantage of using a Pooled Trust is that the charity that administers the Trust has a “Master” Trust form that can be used rather than the Grantor having to incur the expense of hiring an attorney to draft the Special Needs Trust. In addition, the charity is generally willing to serve as Trustee. The disadvantage of the Pooled Trust is that as of the death of the disabled individual, a portion of the remaining proceeds or all of the remaining proceeds held in Trust must be paid over to the charitable organization prior to any distribution of any remaining funds as the disabled individual chooses. The upside of the Pooled Trust is that there are more investment options because smaller “Trusts” can be “pooled” together for investment purposes. This type of SNT is irrevocable and there is generally no age limit for the beneficiary to qualify. 42 U.S.C. §1396p(d)(4)(C).
It is generally possible to fix problems that occur due to a lack of planning when assets pass directly to a disabled individual, but the best choice is to do planning in advance to avoid having to do “crisis planning.” If you have specific questions regarding planning with Special Needs Trusts or how to fix a crisis situation where assets have passed incorrectly to a disabled beneficiary, please email or call me and set up an appointment!
