Supplemental Security Income (SSI) and Medicaid benefits, among others, provide a safety net for children and adults who have serious physical and/or intellectual disabilities. It is important to note that these programs have strict income and asset requirements for beneficiaries.
Setting up a special needs trust (SNT) allows you to provide your disabled loved one with a higher quality of life while protecting his or her eligibility for these important government benefits. Because of the way these specific types of trusts are set up, the assets in the trust are not considered for the purpose of determining eligibility for need-based government programs.
There are two types of special needs trusts: first-party trusts and third-party trusts. Both types of trusts provide the same general benefits, but there are significant differences in how they are funded.
First-Party Special Needs Trusts
A first-party special needs trust is funded using the disabled person’s own assets. Personal injury awards are a common source of income to fund a first-party special needs trust since a serious car accident or medical malpractice can leave the victim with lifelong disabilities. These trusts are also commonly funded by a retirement plan, divorce settlement, life insurance proceeds, or inheritance.
When assets are placed in a trust, the disabled person is no longer considered to legally own them. This helps preserve eligibility for government benefits, as long as strict requirements are followed. For example, the trust must be irrevocable (unchangeable), and the beneficiary must be under age 65 at the time the trust is established. If the beneficiary is a child, a parent, guardian, or court representative can create the trust on his or her behalf.
You may also hear such as trust referred to as:
Payback Special Needs Trust
(d)(4)(A) SNT
(d)(4)(C) SNT
Trust proceeds can only be used for supplemental expenses not covered by any government program. This means, education or hobby-related costs are allowed, but using the funds for food or shelter is not permissible.
It is very important to remember that first-party special needs trusts are generally subject to rules that require the trust to repay the state for the value of benefits received after the disabled individual has passed away.
Third-Party Special Needs Trusts
Sometimes referred to as Supplemental Needs Trusts, Third-party trusts are funded by the assets of a parent, grandparent, sibling, or another concerned party. Often, the trust is part of the estate plan of the person who is funding it. The goal is to ensure that the special needs beneficiary will have the financial resources necessary to enjoy the highest possible quality of life when his or her caretakers are no longer living.
Under a third-party special needs trust, the beneficiary does not legally own the assets in the trust and can’t make spending decisions. The trust is managed by a separate trustee which is chosen by the person setting up the trust and could be a family member, friend, or neutral third party.
Care must be taken. A Trustee can accidentally make the beneficiary ineligible for benefits if the Trustee distributes funds for the wrong reason. Trust disbursements can’t be used for cash gifts (or something that can be converted to cash) but trust funds can be used to fund personal services, entertainment, travel, transportation, and medical costs not covered by insurance, among other things.
Also unlike the first party SNT, when the person with special needs dies, other beneficiaries like family members can be chosen to receive the benefits of the trust.
Do You Have A Family Member Or Loved One Who Requires Special Needs Legal Planning? Contact MGM Law Firm LLC for expert and compassionate advice.