Assure Estate Planning focuses on providing estate planning for individuals and families of special needs children and adults. Often the keystone of planning for those individuals and families is the Special Needs Trust (SNT), in some circumstances (described below) known as the Supplemental Needs Trust. Many times when our clients see us about special needs estate planning, they often ask if it is best to establish an SNT for thier special child during their lifetime or after their death. Like all questions in estate planning, the answer is, “it depends.” It depends on the goals to be achieved and the circumstances in which the parents or guardians and their children find themselves. To decide which type of SNT is right for you and your loved one(s), you should understand the general nature and purposes of an SNT; and second, you should understand the various types of SNTs.
To help you speak meaningfully with a licensed estate planning attorney, here is an overview of the most common types of Special Needs Trusts:
FIRST PARTY (SELF-SETTLED) SPECIAL NEEDS TRUSTS:
As the name implies, this type of trust is funded with money and assets that either already belong to the disabled individual, or are subject to a legal claim by this person. Because setting up this type of trust requires moving funds from the disabled person’s control to the control of a trustee, application must be made to a court for authorization to transfer the funds.
The distinctive feature of this trust is it must contain a “payback” provision, requiring that after the death of the disabled person, Medicaid will be paid back for the services provided to the beneficiary during his lifetime. Medicaid is limited to the amount of assets remaining in the trust, and any funds left over after the reimbursement can be passed on to the beneficiaries heirs.
Finally, it is important to note that, under federal law, this type of trust can only be established by the disabled person’s parent, grandparent, guardian, or court. This prevents the old practice of a disabled person from putting their own money into a trust for the purpose of receiving Medicaid. Despite this trust’s name, it requires the help of a third party to establish.
THIRD PARTY SPECIAL NEEDS TRUSTS:
This is also sometimes called a “supplemental needs trust”, in order to distinguish it from the first-party trust. The name is not as important as how the trust operates. This type of trust can be established by anyone other than the disabled person, with funds that the disabled individual does not own and cannot control in any way. This allows other people to set aside funds for the purpose of helping the beneficiary without interfering with Medicaid benefits.
These trusts are normally written to allow the Trustee to use his absolute and unfettered discretion to use the assets in the trust for the benefit of the beneficiary. So long as the trustee cannot be compelled to use the funds for food and housing for the beneficiary, Social Security will not count the funds as a resource.
These trusts are very often funded by a will, or by life insurance, or a court as part of a judgment from a lawsuit. The funds are not subject to the “payback” requirement of a first party trust, so all the remaining funds can be passed on to the beneficiaries loved ones at the disabled beneficiary’s death.
POOLED SPECIAL NEEDS TRUSTS:
Very often, a family member can serve as the trustee. However, sometimes keeping up with the SSI/Medicaid rules, accounting, reporting, and responsibility of saying “no” to the beneficiary may be more than someone in the family is able to take on. There are professional trustees, but unless the trust is very large (usually in excess of $500,000) the fees charged by a professional trustee would be prohibitive.
In these cases, a pooled trust may be a better option. A pooled trust is one where the funds of many disabled individuals are “pooled” together and maintained by a nonprofit organization. The funds for each beneficiary are held separately, but the funds are invested as a whole.
The funds in these trusts will also be subject to a “payback” provision, requiring Medicaid to be reimbursed for services provided. An alternative is that upon the beneficiary’s death, the funds may be retained by the pooled trust for the benefit of other people served by the pooled trust.
WHICH TRUST IS RIGHT FOR YOU AND/OR YOUR LOVED ONE?:
As you can see just from the summary above, establishing, funding and maintaining compliance with SNT is a complicated matter that should be undertaken only with the guidance and help of a licened estate planning attorney. We hope that the information above will allow you to be better able to communicate meaningfully with professionals about the best way to care for your special child or adult long in to the future.