Special Needs Trusts

The planning you must undertake for a disabled loved one is multifaceted. It can include medical care and educational concerns as well physical adaptations to homes and financial planning. One component that factors into many plans for disabled individuals is a Special Needs Trust. A Special Needs Trust is an arrangement under which property is set aside for the care and support of disabled individuals in a way that does not interfere with eligibility for public benefits.  Although public benefit programs generlly impose low income and asset limits for eligibility purposes, most programs recognize Special Needs Trusts as exempt assets so long as they are established and administered according to that programs' rules.  This exemption is very powerful.  A Special Needs Trust allows disabled beneficiaries to receive the public benefits they rely upon while also having assets available to supplement and enrich their lives.

Types of Special Needs Trusts

There are two basic types of Special Needs Trusts: first-party Special Needs Trusts and third-party Special Needs Trusts.  Although third-party Special Needs Trusts generally play a larger role in the planning process, it's important to know about both types and understand the differences between them.

First-Party Special Needs Trusts

A first-party special needs trust is created when an individual places their own assets into an exempt trust for their own benefit.  This is also referred to as a self-settled Special Needs Trust or "d4a" trust. Related FAQ
What is a
Pooled Trust?Non-profit organizations can also establish and facilitate first-party Special Needs Trusts for multiple beneficiaries, which are called pooled trusts or "d4c" trusts.  First-party Special Needs Trusts can become necessary when an elderly or disabled individual receives a large sum of money, such as an inheritance or personal injury settlement, that would otherwise make them ineligible for benefits they rely upon.  Unless that money could immediately be transferred to a first-party Special Needs Trust, that individual would have to gradually spend it on valid debts and expenses until they were under the applicable asset limit to receive public benefits.  This type of trust can be established by the beneficiaries themselves (if they have the legal capacity to do so) or by a parent, grandparent, or legal guardian of the beneficiary, or by court order.  In all cases, a first-party Special Needs Trust must be established before the beneficiary turns 65 years old.

First-party Special Needs Trusts must abide by very restrictive requirements.  The first restriction they must follow is the "sole benefit rule".  This rule requires that all disbursements from the trust be used for the benefit of the disabled individual.   For example, assets from a first-party Special Needs Trust could not be used to purchase someone else a car.  The second restriction on first-party Special Needs Trusts is that they must contain a "payback" provision.  This provision requires that any state that provided Medicaid coverage for the beneficiary must receive reimbursement from the trust upon termination or death of the beneficiary.  

Third-Party Special Needs Trusts

 A third-party Special Needs Trust is created when someone places their own assets into an exempt trust for the benefit of someone else.  These are sometimes referred to as "Supplemental Needs Trusts" to distinguish them from the first-party variety.   Third-party Special Needs Trusts are much more permissive than first-party trusts.  Third-party trusts are not subject to the sole-benefit rule or payback requirements. Third-party trusts can also be established after a beneficiary's 65th birthday.  There are only two basic requirements that a third-party trust must follow in order to be considered an exempt asset for purposes of Supplemental Security Income (SSI) and Medicaid eligibility:

• First, the disabled beneficiary cannot have the power to revoke the trust; and, 
• Second, the beneficiary cannot have the power to direct the use of trust assets for their own support and maintenance. 

Third-party Special Needs Trusts can be fully discretionary, meaning that a trustee can simply decide to use trust assets how they see fit. However, these trusts typically instruct a trustee to use assets in a way that supplements and enhances the life of a beneficiary without totally supplanting public benefits. 

Special Needs Trusts for Children:

Many parents and family members of disabled children create third-party Special Needs Trusts a part of their estate plan.  Such a trust can be created under a Last Will and Testament, incorporated into a Revocable Living Trust, or established as a separate standalone entity. Related FAQ
What is Parent
to Child Deeming?These trusts are often created prospectively for disabled children who do not currently qualify for Supplemental Security Income, or other public benefits, because of their parents' income and assets but could potentially rely upon them in the future once they are no longer in their parents care.  Even if these disabled children never require public benefits, a Special Needs Trust provides other advantages, including:

• Giving parents or other family members greater control over an inheritance;
• Protecting an inheritance from a disabled child's creditors, and
• Allowing for professional management of an inheritance through a corporate trustee.

In addition to preserving eligibility for public benefits, third-party Special Needs Trusts for children also usually provide standards for a child's ongoing care.   For example, the trust can include guidance to a trustee regarding appropriate living arrangements for a child, recommended extracurricular activities, and establish an ongoing care management plan.  These guidelines ensure that once a disabled child is no longer in their parents' care they can continue to lead a safe and enriched life.  Oftentimes, parents creating these trusts also draft separate memorandums of intent that provide helpful information for a trustee or caregiver that do not need to be included in the trust itself (such as a disabled child's medical history or personal preferences).

Special Needs Trust Administration

If established properly, a Special Needs Trust will be considered an exempt asset that will not interfere with public benefit eligibility.  However, distributions from that trust can still be considered income to a beneficiary that could reduce or eliminate public benefits altogether.  Distributions from a Special Needs Trust will be governed by a distribution standard in the trust agreement itself, but a trustee must also have a fairly comprehensive understanding of public benefits law to know which distributions are appropriate.  If the focus of the Special Needs Trust is preserving eligibility for SSI and Medicaid, permissible distributions include:

• Purchasing exempt assets, such as buying a vehicle or home for a beneficiary; and,
• Paying third parties who provide services to a beneficiary, such as by paying a beneficiary's dental bills or legal expenses

A trustee should generally avoid making cash disbursements to a beneficiary, as these distributions will be treated as unearned income by the Social Security Administration that will reduce a beneficiary's SSI benefit dollar-for-dollar (after a $20 income exclusion).Related FAQ
What is In-Kind
Support and
Maintenance?  Distributions from a trust used to pay for a beneficiary's food or shelter expenses, which the Social Security Administration refers to as in-kind support and maintenance, can also be considered unearned income that will reduce SSI benefits (up to a certain limit). Trustees who have questions about how to administer a Special Needs Trust or about the implications of certain distibutions should seek the advice of a qualified attorney.