Estate PlanninG

How to Provide Financial Security For Your Loved One With Special Needs Through A Special Needs Trust

If you’d like to make sure that your loved one with a disability or special need is financially supported when you’re gone, you should consider creating a special needs trust.

This is because, unfortunately, an inheritance received outright could be bad news for your loved one if they’re currently receiving government aid or benefits, or will need to apply for aid in the future.

For someone with mental or physical disabilities, government benefits such as Supplemental Security Income (SSI) or Medicaid are based on need. In order to get these benefits, the individual must pass a means test to ensure they don’t have adequate money or property that could be used to pay for care (nursing home costs, in-home care, medical equipment, therapy, or other necessities for proper care and living expenses). This means that if an individual with a disability or special need has too many resources, including property, money, or income, they can be ineligible for government aid. If they’re not immediately proven ineligible, then they could be subject to a penalty period in which they’re required to spend down the money, own no property (unless it’s co-owned by a spouse), and have little to no income in order to become eligible for aid.

So, what’s the solution? Creating a special needs trust (SNT), also sometimes called a supplemental needs trust, gives you a way to provide for your loved one who is disabled or has special needs while mainintaining their current benefits, or leaving open the option for need-based governmental aid in the future, even if they receive an inheritance. The great thing about an SNT is that as long as it meets certain legal criteria, the existence of the SNT and the amount of money and property inside it won’t affect your loved one’s means test.

Let’s break it down. There are two types of SNTs: a first-party SNT a third-party SNT.

First-Party Special Needs Trust

A first-party special needs trust is created by a disabled individual using funds received through inheritance or a legal settlement. A first-party SNT can also be created if the individual with special needs either has assets or expects to receive assets, but still wants to qualify for public benefits.

To complicate things even further, there are two types of first-party SNTs. Both require the trustmaker to have the mental ability to create a trust. The two types are individual and pooled.

Individual first-party SNTs are funded with the disabled individual’s own property. The disabled individual is the only beneficiary of the trust because the property must be used for their sole benefit.

This type of SNT requires that the trustmaker be under the age of 65 and meet the definition of “disabled” when the trust is created.

A pooled first-party SNT can be created by a disabled individual over the age of 65 in most states, or it may also be created by the parents, grandparents, or guardian of the disabled individual.

The individual must also state that, at the disabled beneficiary’s death, the remainder of the trust property, up to the amount paid by the government aid (i.e., Medicaid) on behalf of or to the disabled beneficiary, must be paid back to the government. This is often referred to as state recovery of the aid the government paid to or on behalf of the disabled person. Any remaining amount can be paid to other beneficiaries that the disabled beneficiary named in the first-party SNT trust agreement.

Third-Party Special Needs Trust

On the other hand, a third-party trust can be created by anybody wanting to give money or property to an individual who is or may become disabled, and therefore needs to apply and qualify for governmental aid.

One option to create a third-party SNT is through a revocable living trust or a will (though an SNT created in a will would be subject to the time and expense of the probate process before it is officially created). A third-party SNT may also be a standalone, separate trust, either revocable (modifiable) or irrevocable (unmodifiable).

A third-party SNT, often created by a disabled individual’s parent (trustmaker), makes it easier for other people, such as grandparents, family members, or others to name the trust as a beneficiary or to gift property or money to the trust for the benefit of the disabled beneficiary. If you are the parent of a disabled individual, consider adding a third-party SNT to your estate plan and let your family members know it exists. In lieu of cash or other direct gifts, people can use the trust to receive gifts or an inheritance, knowing that it will be set aside for their disabled loved one without hurting their loved one’s current government aid or any help they may need in the future. Any property or money in the third-party special needs trust won’t be a countable resource of the beneficiary for any means-tested government benefit program.

The Differences Between a First-Party SNT and a Third-Party SNT

One difference between the two types of special needs trusts is that the beneficiary funds a first-party SNT with their own funds, while a third-party SNT is funded by a family member (or other third party) for the beneficiary’s benefit.

In addition, a third-party SNT isn’t required to use the remaining assets to reimburse the state for the Medicaid benefits received by the beneficiary during their lifetime. Therefore, this type of SNT is great for people who want to set aside property for their loved one with disabilities, preserve the beneficiary’s public benefits, and also remain in full control of where all the remaining SNT assets will go when the beneficiary dies.

Receiving Money from a Special Needs Trust

Both first-party and third-party SNTs must limit the payments made by the trustee to or on behalf of the disbled beneficiary, meaning that the trust property should only be used to supplement, not replace, what the disabled beneficiary is receiving in the form of government aid.

Depending on the specific government program, there may be a limit on the amount that may be spent on personal items. Trustees have to be careful when giving money to or spending money on behalf of the disabled beneficiary. It’s important that they follow both the trust instructions as well as the rules of the government program providing the benefits to the disabled individual in order to to prevent the individual from being disqualified from the aid program.

Creating a third-party SNT as part of your estate plan is how you can provide for your loved one with a disability or special need. A properly drafted and funded SNT can ensure that your loved one is eligible for potential government aid while also having funds to supplement that aid.

Would you like to provide financial security for your loved one with a disability or special needs? We can help you discuss your options. Call us today at (925) 831-4840 to set up a virtual appointment.