Understanding Special Needs Trusts

by Rebecca Eyman

It is a common estate planning goal to be able to provide for our loved ones after we have passed away.  This is particularly true for those of us with friends and relatives with special needs.  The common instinct is to leave a gift or inheritance in our estate planning documents for the person with special needs.  However, the risk in this course of action is that your generous gift may have the unintended consequence of disqualifying that person for public benefits like Supplemental Security Income (SSI) or Medicaid.

To avoid this problem, many people choose to set up a Special Needs Trust (SNT) that can provide benefit and support to a person with special needs without jepordizing his or her public benefits.  This article explains the basics of SNTs to help you determine if one should be part of your estate planning documents.

What is a Special Needs Trust?

To fully understand SNTs, it’s helpful to first understand trusts generally.  A trust is a fiduciary arragement that allows a third party (known as a trustee) to hold assets on behalf of a beneficiary.  More specifically, a SNT is a particular type of trust in which the trustee (which can be a person or a financial institution), holds the assets for a beneficiary who is receiving public benefits in a way that does not uninentionally interfere with these benefits.

In many ways, a SNT is more restrictive than other types of trusts.  A typical trust can be revocable, meaning that it can be modified or terminated by the person or persons who created it. However, an important requirement of SNTs is that they must be irrevocable.  Also, funds from SNTs can only be used to pay for things that are not already covered by public benefits.  For example, if public benefits pay for a beneficiary’s shelter and food, funds from a SNT cannot be used for those purposes.  Common uses for funds from SNT funds are personal items or furniture, medical equipment, expenses not covered by health insurance, vacations/travel, recreation, or entertainment.

First Party vs. Third Party Special Needs Trusts

A SNT can be either first-party funded, or third-party funded.  A first-party SNT is funded with assets belonging to the beneficiary.  Frequently, a first-party SNT is funded with the pay-out from a personal injury or wrongful birth lawsuit.  On the other hand, the assets in a third-party funded SNT come from a third party who is not the beneficiary.  If you decide to make a gift to a person with special needs, or include that person in your estate plan, your funds will be the basis of a third party SNT.

Using Testamentary Trusts

You can create an “inter vivos” SNT during your lifetime. However, if you would rather devise assets to a person with special needs through your estate plan, you can instead utilize what is called a testamentary SNT.  This means that the SNT will not actually exist until after you have passed away.  To create a testamentary trust, you specify in your estate planning documents that, if a particular beneficiary is on public benefits at the time the distribution is to be made, a SNT will be created for his or her benefit.  An important choice you will have to make is to decide who will act as trustee of this testamentary SNT.  Keep in mind, this person may need to fill this role for many years, possibly for the lifetime of the beneficiary.  For this reason, it is a popular choice to appoint a professional fiduciary or financial institution as the trustee of a SNT.

If you have questions about SNTs or estate planning generally, we would be happy to meet with you to discuss these important issues.