Using a Special Needs Trust to Supplement Basic Benefits Provided by the Government
By Don Drake, Connelly Law Offices, Ltd.
"A special needs trust, also known as a supplemental needs trust (SNT), is a trust designed to provide financial support for people with disabilities or access and functional needs without affecting their eligibility for government benefits such as Medicaid or Supplemental Security Income (SSI)," said RJ Connelly III, a professional fiduciary and certified elder law attorney.
Government benefits are based on financial need and have specific income and asset requirements. If these requirements are exceeded, individuals may become ineligible for assistance. Attorney Connelly suggests that supporting a loved one with a disability financially can be challenging while maintaining their eligibility for benefits. One way to do this is to allocate funds to a trust, which enables the provision of help without it being counted as personal income. A special needs trust has a grantor, trustee, and beneficiary.
Special needs trusts are intended to supplement, not replace, the essential assistance provided by government programs such as Medicaid and Supplemental Security Income (SSI). They pay for additional goods and services, referred to as "special needs," that cannot be covered by public aid funds.
This means that if the trust money is used for regular food or shelter costs or distributed directly to the beneficiary, it counts as income to the beneficiary. This affects eligibility for government benefits such as Medicaid and SSI. One of the most important jobs of the trustee is to use discretion in making distributions from the trust not to jeopardize the beneficiary's eligibility for these government benefits.
There are two main types of special needs trusts: third-party and first-party. While third-party SNTs are the most common, there are some instances where a first-party trust makes more sense.
Third-party special needs trust
A third-party SNT is like a traditional trust, funded by someone other than the beneficiary, and can be revocable or irrevocable. It can also be set up as a stand-alone or testamentary trust. A stand-alone trust provides the beneficiary access to assets during the grantor's lifetime, while a testamentary trust is funded after the grantor's death and is contained within their will.
First-party special needs trust
A first-party SNT is funded by the beneficiary or a loved one using the beneficiary's assets. If mentally able, individuals can set up their own special needs trust account to protect themselves from losing government assistance. This type of SNT requires a Medicaid repayment provision, which stipulates that any remaining assets in the trust will be used to repay Medicaid before being distributed to contingent beneficiaries after the beneficiary passes away.
Pooled special needs trust
Nonprofit organizations administer pooled special needs trusts, which gather funds from multiple families, donors, and community members to serve each family. Each member is named as a separate beneficiary within the trust and given their account. A trustee chosen by the nonprofit gains control of the fund and acts on behalf of each beneficiary. But there are some negatives to pooled trusts.
First, non-profit organizations are required to manage pooled trusts. However, the management quality and potential dissolution of the organization can affect the trust. Additionally, withdrawing assets from a pooled trust is not always straightforward, making the initial decision crucial.
Second, while other trusts can distribute assets to family beneficiaries upon the death of the beneficiary, a pooled trust requires assets to be sold for their proceeds, and any remaining assets are likely to be retained by the trust.
Finally, before committing to a pooled trust, it's essential to know all the potential expenses involved, such as set-up and annual fees.
Why So Many Trusts?
"There are various types of trusts due to regulations surrounding Supplemental Security Income (SSI)," explained Attorney Connelly. "SSI is a government program that helps individuals with low incomes and special needs."
To qualify for SSI, an applicant or beneficiary can only have $2,000 in their name. If they have more, they can still qualify by putting the excess into a first-party special needs trust. The funds in the trust are used for their benefit during their lifetime, and any remaining assets are used to reimburse the government for medical care costs after their death.
When to Use a Third-Party Trust
Family members commonly use the third-party special needs trust to support individuals with special needs. The trust can hold various assets, such as a house, stocks, bonds, and investments. The assets held in a third-party trust do not affect the beneficiary's access to SSI benefits. The funds can be used to pay for the beneficiary's supplemental needs beyond those covered by government benefits, like a first-party special needs trust. A third-party trust does not have the "payback" provision of first-party trusts, which means the remaining funds can go to other family members or charities.
Setting Up a SNT
Creating a special needs trust is like setting up any trust fund. It's essential to consider the needs of your loved one, including their current income, expenses, and frequency of financial assistance. Once these factors are established, you can proceed with setting up the trust account by following the steps below:
Designate the beneficiary - Your beneficiary can be someone with a disability or specific needs that align with the trust's purpose.
Choose the trustee - The grantor can name themselves as the trustee, but sometimes the beneficiary can also be named. In a pooled trust, the nonprofit organization in charge of the account will likely be the trustee.
Develop and Sign the Trust Documents - While it is possible to establish a special needs trust independently, it is advisable to seek the guidance of an experienced estate planning attorney. Estate planning attorneys focus on trusts and will ensure that you comply with all the essential regulations and regulations involved in establishing a trust.
Fund the Trust - One option to consider when setting up a trust is funding it with various assets such as money, personal items, real estate, or investments. By doing so, you can ensure that your assets are protected and distributed according to your wishes.
A Final Thought
Attorney Connelly emphasizes that drafting a well-crafted special needs trust is crucial for reducing taxable estate, transferring assets to a person with disabilities without penalty, and ensuring future care for beneficiaries. Each person with special needs requires an unique special needs trust and a great deal of planning.
As part of the planning process, it is important to anticipate challenges that may arise throughout your loved one's lifetime. It is ideal for everyone involved in the process, from the estate planning attorney who drafts the trust documents to the trustee who manages it, to be experts in special-needs trusts to avoid mistakes that could lead to bigger issues later. Schedule a meeting with a qualified and experienced elder law attorney to determine the right trust for your family.