What's a Special Needs Trust For, and How Can It Help?

A special needs trust (or supplemental needs trust) can help a person with disabilities supplement any benefits they may receive from government programs. With a well-crafted special needs trust, the beneficiary can receive public benefits while receiving funds from the trust at the same time.

Special needs trusts come in three main types, but first it is important to understand how a typical trust works.

What Is a Trust, and How Does It Work?

A trust is a kind of legal arrangement between three parties:

• a donor, who supplies the funds for the trust;
• a trustee, who agrees to hold and administer the funds according to the donor's wishes; and
• a beneficiary or beneficiaries who receive the benefit of the funds.

In many cases, the donor spells out their wishes in a document that instructs the trustee on how they should use the trust assets.

Trusts have been part of estate planning for a long time. They are highly useful tools for ensuring that a donor's property is administered as they see fit. One of the reasons trusts are so popular is that they usually survive the death of the donor. This provides a low-cost way to manage the donor's assets for others when the donor has passed away.

So, What Is a Special Needs Trust?

A special needs trust, or SNT, is a trust tailored to a person with disabilities. It aids in managing assets for that person's benefit, while not compromising their access to important government benefits.

The three main types of SNTs are first-party, third-party, and pooled. All three name the person with disabilities as the beneficiary.

• A "first-party" SNT holds assets that belong to the person with disabilities. This would include an inheritance or an accident settlement.
• A "third-party" SNT holds funds belonging to other people who want to help the person with disabilities.
• A pooled trust holds funds from many different disabled beneficiaries.

Why Are There Different Types of SNTs?

The reason there are several different types of trusts has to do with regulations regarding Supplemental Security Income (SSI). SSI is a government program that provides financial support to people with disabilities who have limited income.

To qualify for SSI, an applicant or beneficiary can have only $2,000 in their own name. Some people may have more than $2,000 in their own name because of excess savings, an inheritance, or an accident settlement. In this case, the government allows them to qualify for SSI if they place their assets into a first-party SNT.

First-Party SNT

While the beneficiary is living, the funds in this kind of trust benefit them directly. When they have passed away, any assets remaining in the trust can then reimburse the government for the cost of their medical care.

These trusts are especially useful for beneficiaries who are receiving SSI and come into large amounts of money. With a first-party SNT, the person retains their public benefits and can still use their own funds when necessary.

When to Use a Third-Party SNT

The third-party SNT is most often used by parents and other family members to assist a person with special needs. They can hold any kind of asset imaginable belonging to the family member or other individual. This may include a house, stocks and bonds, and other types of investments.

The third-party SNT functions like a first-party SNT in a few ways. The assets in it do not affect an SSI recipient's access to benefits. In addition, the funds can pay for the supplemental needs of the individual beyond those covered by government benefits.

But a third-party SNT does not contain the "payback" provision found in first-party trusts. When the beneficiary dies, any funds remaining in their trust can pass to their family members or a charity. The funds do not have to go toward reimbursing the government.

More on Pooled Trusts

A pooled trust is an alternative to the first-party SNT; essentially, a charity sets it up. It allows beneficiaries to pool their resources for investment purposes, while still maintaining separate accounts for each individual.

When the beneficiary dies, the funds remaining in their account reimburse the government for their care. However, in this case, a portion also goes toward the nonprofit organization responsible for managing the trust. (Learn more about pooled trusts and their benefits, and search our online directory for a pooled trust in your state.)

SNTs, Taxes, and Medicaid

Anyone can establish an SNT. In certain situations, gifts into a properly drafted SNT could help reduce the size of the donor's taxable estate.

In addition, seniors seeking to qualify for long-term care coverage through Medicaid can use certain SNTs. They can transfer their assets into a properly drafted third-party SNT for the sole benefit of a person with disabilities. This way, they will not incur a transfer-of-assets penalty. This permits the elder to qualify for Medicaid while also ensuring the future well-being of their loved one with disabilities.

Connect With a Special Needs Planning Attorney

Of course, every person with special needs is different. So, every special needs trust is going to be different as well. To determine which SNT is right for your family, be sure to meet with a qualified special needs planner.

Find a special needs planning attorney near you today to discuss your needs. They will understand the ins and outs of special needs law specific to your state. You can rely on them to walk you through the various types of SNTs and draft a well-crafted one specifically tailored to you.

For additional reading on SNTs, check out the following resources:

• What to Know Before Beginning Special Needs Planning
• Lifetime Money Management for Children With Disabilities
• How Third-Party Special Needs Trusts Differ From Other SNTs
• Choosing Trustees for SNTs: 5 Considerations