Estate PlanninG

What is a First Party Special Needs Trust?

A First Party Special Needs Trust [“SNT”] is established by a disabled person to hold their assets so that they do not lose government benefits.

An SNT is used to hold an inheritance, childhood savings, litigation settlement and other assets that is in the name of the disabled individual.

The Omnibus Budget Reconciliation Act of 1993 or “OBRA ‘93” allows the use of SNTs to hold assets of individuals so that they can keep their Medi-Cal eligibility.

The Foster Care Independence Act of 1999 allows the use of SNT so that SSI recipients will not lose that benefit.

There are various requirements needed to set up a SNT:

  1. The beneficiary must be disabled under the definition established by the Social Security Administration. This definition requires that the beneficiary must be under 65 and unable to engage in any substantial activity due to a physical or mental ailment that will last longer than a year or end in death;
  2. The beneficiary’s parent, grandparent, legal guardian or the court must insure that the correct documents are prepared and that the trust is funded;
  3. If the beneficiary has legal capacity a parent or grandparent can set up the SNT and there is no need for court involvement, which makes this method quicker and cost effective;
  4. When the beneficiary is a minor or does not have legal capacity, then a court has to be involved and this method is more costly and takes longer.

When there is a litigation settlement that involves a special needs individual, a court ordered trust can be established or the beneficiary can join a Pooled Special Needs Trust.

A Pooled Special Needs Trust holds the assets of other beneficiaries who have their own separate sub-accounts. It is managed by a nonprofit organization and the assets are pooled for investing and management purposes.

It is very important to report the funding of a SNT to every agency the beneficiary receives benefits from because it is required by law and either explicitly or implicitly provides proof that the agency approved the trust.

As to the tax treatment of a SNT, it is considered a grantor trust for income taxes purposes and the beneficiary, who funded the trust, is considered the grantor --- not the person who set up the trust. So the beneficiary has to report all income generated by the trust on his or her tax return.

Finally, please note that tax income is different from benefits income. Benefits income are not taxed. Taxable income is any income earned by the trust whereas benefits income is cash or payment from the trust for food or shelter. You may have to educate the IRS on this important distinction.

The attorneys of Santaella Legal Group, APC servicing the San Francisco bay area in San Ramon, Danville, Dublin and Pleasanton are available to assist you with any special needs, elder law, Medi-Cal and estate planning.