For families with a loved one who has a disability, financial planning extends beyond traditional estate planning. A Special Needs Trust (SNT) is a crucial legal tool that ensures financial support for the beneficiary, while preserving their eligibility for government benefits such as Supplemental Security Income (SSI) and even Medicaid.
Let’s explore how a Special Needs Trust can protect your family’s interests, the steps to create the trust, some of the essential language required, and how to properly execute the trust.
A Special Needs Trust Serves Multiple Purposes
Preserving Government Benefits: Many government assistance programs, such as SSI and Medicaid, have strict income and asset limits. If a person with special needs inherits money directly, they may lose access to these essential benefits. A properly structured SNT allows funds to be used for supplemental expenses without disqualifying the beneficiary from government aid.
Providing Lifetime Financial Security: An SNT ensures that assets are managed responsibly and distributed as needed, rather than being spent all at once. This protects the long-term well-being of the beneficiary.
Preventing Financial Exploitation: Placing assets in an SNT under the control of a trustee protects the funds from mismanagement, creditors, and financial abuse.
Offering Flexibility for Additional Needs: The trust funds can be used for expenses beyond basic necessities, such as:
- Medical treatments not covered by Medicaid
- Education and vocational training
- Personal care attendants
- Recreational and travel expenses
- Special equipment or technology
What Type of Special Needs Trust Do We Need?
There are three main types of SNTs, each with different funding sources and legal requirements. Knowing and understanding the difference can help avoid confusion and interference with adequate funding resources.
First-Party Special Needs Trust (Self-Settled SNT):
Funded with assets owned by the beneficiary, such as an inheritance, lawsuit settlement, or personal savings.
Must be an irrevocable trust and include a Medicaid payback provision (remaining funds must reimburse Medicaid upon the beneficiary’s death).
Must be created by a parent, grandparent, guardian, or the court.
Third-Party Special Needs Trust:
Funded by parents, relatives, or other third parties, but it cannot be funded by the beneficiary. These are also commonly referred to as Supplemental Needs Trusts.
No Medicaid payback requirement, meaning leftover funds can be distributed to other heirs after the beneficiary's death.
Often used in estate planning to leave an inheritance for a child with special needs.
Pooled Special Needs Trust:
Managed by a nonprofit organization, pooling assets from multiple beneficiaries while maintaining separate accounts.
Suitable for families who may not have a designated trustee or wish for professional trust management.
Choosing a Trustee
Choosing a trusted Trustee who is responsible for managing, investing, and distributing funds is key for your SNT to be successful. The trustee must have a clear understanding of the government benefit rules to avoid unintentional disqualification of the beneficiary. Options for a Trustee include:
- A family member (such as a sibling or close relative).
- A professional trustee, such as a bank or trust company, for expert financial management.
- A nonprofit organization in the case of a pooled trust.
Draft the Trust Document
An attorney specializing in Special Needs planning should draft the trust document to comply with federal and state laws. Drafting a trust of this sensitive nature on your own could allow for mistakes you may not be aware of and unintentionally cost the beneficiary dearly.
Keep in mind, the Social Security Administration (SSA) regulates Special Needs Trusts, and will review the trust to verify it meets specific requirements and will properly qualify the applicant for benefits.
Essential Language in a Special Needs Trust
A well-drafted SNT must include specific provisions to ensure the funds are protected and properly managed. Here are some key clauses to consider:
Discretionary Distribution Clause: The trust must grant the trustee full discretion over distributions to avoid counting trust assets as the beneficiary’s personal resources.
Example: The Trustee shall have sole and absolute discretion to distribute funds for the beneficiary’s supplemental needs but shall not provide distributions that replace or reduce government benefits.
Spendthrift Clause: This protects the trust assets from creditors, lawsuits, and financial mismanagement.
Example: No interest in the trust shall be subject to assignment, garnishment, or voluntary or involuntary transfer by the beneficiary.
Medicaid Payback Clause (For First-Party SNTs): A required clause for self-settled SNTs, stating that remaining funds must reimburse Medicaid upon the beneficiary’s death.
Example: Upon the death of the beneficiary, any remaining assets shall first be used to reimburse Medicaid for medical assistance received by the beneficiary during their lifetime.
Prohibition Against Basic Support
To maintain eligibility for SSI and Medicaid, the trust should not provide funds for food or shelter expenses directly. Instead, distributions should be made for supplemental needs such as medical care, therapy, education, and recreation.
Executing the Special Needs Trust
Fund the Trust: Once the trust is established, assets must be properly transferred into it. Common funding sources include:
- Direct contributions from family members.
- Life insurance policies with the trust listed as the beneficiary.
- Inheritance allocations directed into the trust instead of given directly to the beneficiary.
Manage Distributions Carefully: The trustee must ensure that payments do not interfere with government benefits. Payments should be made directly to service providers (e.g., paying for medical treatments or education) rather than giving money to the beneficiary.
Maintain Proper Records: To prevent legal or financial issues, the trustee should:
- Keep detailed records of distributions.
- File annual tax returns for the trust.
- Periodically review and update the trust document to comply with changing laws.
Educate Family and Caregivers: All involved parties, parents, siblings, and caregivers should understand the trust’s purpose and rules to ensure its long-term success.
A Powerful Tool To Protect a Loved One
A Special Needs Trust is a powerful tool for protecting a loved one’s financial future while maintaining access to vital government benefits. By carefully selecting the trust type, drafting precise legal language, and executing proper administration, families can ensure long-term financial security and peace of mind for their special needs family member.
Given the complexity of trust laws and benefit regulations, it’s essential to work with an experienced Estate Planning Attorney or Wealth Management Firm to properly set up and manage an SNT. With the right strategy in place, families can provide lasting financial support while preserving the dignity and independence of their loved ones.
