When it comes to planning the financial future of a loved one with disabilities, it’s crucial to make thoughtful choices that ensure they can still qualify for important government benefits, all while providing them with extra support. A special needs trust (SNT) is a powerful legal instrument specifically crafted to strike that crucial balance. Unlike regular trusts, an SNT helps maintain access to needs-based programs like Medicaid and Supplemental Security Income (SSI), while also covering expenses that improve the beneficiary’s quality of life. This guide will outline what a special needs trust is, how it differs from other types of trusts, and when it may be required.
What Is a Special Needs Trust?
A special needs trust is a legally binding setup that enables individuals with disabilities or chronic illnesses to receive financial help without disqualifying them from public assistance programs. Assets placed in the trust are overseen by a designated trustee, who distributes funds for eligible expenses, including medical care, transportation, or recreational activities.
Key features of an SNT include:
- Irrevocability: Once the trust is created, it can’t be changed or revoked without going to court for approval.
- Asset protection: The assets in the trust aren’t counted towards the beneficiary’s eligibility limits for government benefits.
- Supplemental use: Funds can be used for non-essential expenses (like therapy, travel, or education) that public programs don’t cover.
Types of Special Needs Trusts
There are three main types of SNTs, each designed for different situations:
1. First-Party Special Needs Trust
Funded by: The assets of the beneficiary, such as money from an inheritance or settlement from a personal injury case.
Key requirements:
- The beneficiary must be under 65 when the trust is set up.
- Medicaid must be reimbursed from any remaining funds after the beneficiary passes away.
Best for: Protecting unexpected windfalls while ensuring continued eligibility for benefits.
2. Third-Party Special Needs Trust
Funded by: Assets from family members, life insurance payouts, or gifts.
Advantages:
- No requirement to pay back Medicaid.
- Gives more flexibility in distributing leftover assets to other heirs.
Best for: Estate planning aimed at providing long-term support without risking benefits.
3. Pooled Special Needs Trust
Managed by: Nonprofit organizations that combine resources from multiple beneficiaries.
Benefits:
- Lower costs for administration.
- Ideal for smaller estates or if family trustees aren’t an option.
Consideration: Medicaid reimbursement might apply to the beneficiary’s share of the pooled funds.
How Does a Special Needs Trust Differ from Other Trusts?
While traditional trusts (like living trusts) primarily focus on how assets are distributed or on avoiding probate, SNTs have distinct characteristics that set them apart:
| Feature | Special Needs Trust | Ordinary Trust |
|---|---|---|
| Purpose | Preserve benefit eligibility + supplement needs | Distribute assets, minimize taxes, avoid probate |
| Irrevocability | Typically irrevocable | Often revocable |
| Medicaid Impact | Assets excluded from eligibility calculations | Assets may count toward Medicaid limits |
| Post-Death Obligations | First-party SNTs require Medicaid reimbursement | No reimbursement requirements |
For instance, a living trust gives grantors control over their assets while they’re still alive, but it doesn’t safeguard government benefits. On the other hand, a Special Needs Trust (SNT) has strict rules in place to ensure that disbursements don’t interfere with public assistance programs.
When Should You Consider a Special Needs Trust?
You might want to set up an SNT in any of the following situations:
- If you’re receiving an inheritance or settlement: Direct gifts to a beneficiary could make them ineligible for SSI or Medicaid.
- When planning for long-term care: An SNT can cover costs for specialized therapies or equipment that Medicaid doesn’t pay for.
- In estate planning: It helps secure your loved one’s financial future without jeopardizing their benefits.
- As caregivers age: Parents of adult children with disabilities can use third-party SNTs to ensure their children are taken care of in the future.
4 Benefits of a Special Needs Trust
- Maintained eligibility: The assets in the trust don’t count toward SSI’s asset limit of $2,000.
- Protection from creditors: Trust assets are safe from lawsuits or debt collectors.
- Managed disbursements: Trustees oversee funds to prevent any misuse.
- Tax benefits: Third-party SNTs don’t pose income tax issues for the beneficiaries.
4 Key Things to Keep in Mind When Setting Up a Special Needs Trust
- Choose the right type: Collaborate with an attorney to see if a first-party, third-party, or pooled SNT fits your needs best.
- Pick a trustee: Select someone who understands benefit programs and knows the needs of the beneficiary.
- Outline allowed expenses: Clearly define what the funds can be used for, such as medical co-pays, travel, or education, to avoid affecting benefits.
- Think long-term: Be sure to update the trust after significant changes in life (like shifts in public benefit laws).
Is a Special Needs Trust Right for You?
A special needs trust is a vital resource for families facing the intricacies of disability planning. By enhancing government benefits without affecting eligibility, SNTs offer both peace of mind and financial security. Whether you’re protecting an inheritance, arranging an estate plan, or handling a settlement, working with a knowledgeable attorney can ensure that your trust meets the legal standards and caters to your loved one’s specific needs.
At Antanavage Farbiarz Attorneys at Law, we focus on creating customized special needs trusts that safeguard your family’s future. Get in touch with us today to set up a consultation and discover how we can assist you in building a lasting legacy of care.
Our family is here for your family – give us a call at (610) 562-2000 or click here to schedule a consultation.
Stay up to date with the latest tips from Antanavage Farbiarz, PLLC by following us on Facebook and LinkedIn.
