The Basics of a Special Needs Trust 

This article is not intended to provide you with legal advice. Should you seek legal advice, please consult an attorney. KTS would gladly recommend an attorney should you need one. It’s important to have an attorney take appropriate actions on your behalf and to avoid issues that may be discussed in this article.

Ensuring a secure financial future is a priority for most of us. Being disabled makes this goal more pressing with the inherent uncertainty of what the future may hold. And being eligible for government benefits shouldn’t mean you or a loved one loses income and assets. With this in mind, those receiving government benefits have found that a legal arrangement called a special needs trust is an important part of their financial planning. Think of it as “special needs planning.”

What is a special needs trust? 

A special needs trust (SNT) helps disabled individuals keep their social security benefits from Supplemental Security Income (SSI) and Medicaid benefits while protecting their income and assets. The purpose of a special needs or supplemental needs trust is twofold; to provide protection of the income and assets of disabled individuals receiving Medicaid or SSI benefits and eliminate the need to spend down any excess income for Medicaid. 

Because spending limits can be avoided with an SNT, many people use these types of trust to give them more control over how their funds will be spent, which in some states, are “untouchable by the creditors of the beneficiary.” The trustee, whether a person or financial organization, holds and handles the beneficiary’s assets. That is the essence of this trust agreement.

SNTs act as a supplement to a beneficiary’s benefits as opposed to replacing them. Disabled individuals under 65 who receive a lump sum, for example, from a personal injury settlement or inheritance, can help maintain their eligibility for government benefits through a supplemental needs trust. The special needs trust document ensures this income can be used to supplement their regular income now and in the future. In addition, income put into a supplemental needs trust can make an individual eligible for a Medicare Savings Program.

Here are some of the basics you should know:

Who qualifies as a disabled person and how does the SNT help?

A special needs trust is a common legal and estate planning tool that allows someone who is physically disabled, mentally disabled, has a persistent disability, or is chronically ill to receive additional income and support without jeopardizing their public benefits eligibility. Financial gifts, an income settlement, or inheritance, for example, could affect a disabled individual’s ability to qualify for government aid.

The SNT trust is therefore established solely to benefit the beneficiary (disabled person for whom the trust was created) by supplementing their Medicaid or Social Security program aid. At the same time, the SNT funds are not counted towards benefit qualifications and help keep income and assets to stay below required limits.

Disabilities, as classified by the Social Security Administration, can be found on the SSA government website: http://www.ssa.gov/disability/professionals/bluebook

Is the special needs trust a revocable trust?

Once the trust is established, the short answer is no. A special needs trust is an irrevocable trust, which means the trust can’t be amended, modified, or terminated unless the beneficiaries grant permission. It’s important to note that the assets held in an SNT are specifically designated for the beneficiary and in some situations cannot be seized from a lawsuit or by creditors.

Does an SNT protect government benefits in spite of an inheritance?

Parents of a disabled child naturally want to be sure their child with special needs is financially stable once they pass. This is why financial planning is key and why parents want to be sure a disabled child’s inheritance will not make them ineligible for needed government benefits. Supplemental needs trusts can ensure such disabled individuals are still eligible for these benefits while inheriting from their parents or other family members. 

Verifying government benefit eligibility includes consideration of an applicant’s income and assets. This type of special needs trust owns a disabled person’s assets and therefore manages them. This ensures the continued eligibility for SSI and Medicaid while passing on assets to pay bills (not food or housing) that are related to care and needs like transportation and caretakers.

How do I set up a special needs trust? 

If you haven’t already thought about estate planning, you may want to tackle this first. Consult an attorney who handles estate planning and these kinds of trusts. Your attorney can help you understand the state and federal requirements for funding and setting up the trust. 

Once you decide you want to set up a trust for yourself or a family member, it’s important to think about how the trust will be funded, how the funds should be dispersed as well as how much money will be needed and for how long. Other considerations include meeting beneficiary needs and who controls the assets. Trust proceeds from a special needs trust is typically used for caretaker costs, medical bills, and transportation.

You will need to name a beneficiary and appoint someone you trust as the trustee. This person will manage the finances and follow the goals of the trust to be sure it is upheld. 

Remember, that the special needs trust is a legal arrangement that may be created by you, the grantor. You will decide its structure and funding, and make decisions as to who will benefit and who will protect the beneficiary according to the trust requirements.  Multiple trust assets can be held and managed in a trust and include money from a bank account or investments, property like a house, etc. 

There are three roles to be filled within an SNT, which is true of all trusts:  

• Grantor is the person who establishes the trust, designates a trustee, and provides the funding. As a grantor, you or your legal representative creates the trust and determines the terms and details to ensure the trust’s purpose and instructions are clear.
• Beneficiary is the disabled person who will benefit from the trust and is the person for whose sole benefit it was created. First-party SNT beneficiaries must be defined as disabled according to the Social Security Administration. And in some states, beneficiaries of third-party SNTs are also required to be disabled.
• Trustee is the person who has control of the trust and is responsible for managing the funds according to the rules of the trust and for the sole benefit of the beneficiary. Serving as a trustee will continue as long as the beneficiary is still alive. Trustee duties include recordkeeping, preparing required SSI and Medicaid reports, filing state and federal trust tax returns, and using funds to meet the beneficiary’s needs. These needs can include anything that government benefits don’t cover, except for the basics of shelter and food. Funds in the trust could pay for medical equipment like a wheelchair or home furniture.  

When does it make sense to set up a special needs trust?

Special needs trusts are commonly considered by those who have a disabled loved one who can benefit from the funding while not removing their eligibility for government benefits. This is especially important for disabled individuals who will need assistance throughout their lives and who do not have job-sponsored health insurance. 

But qualifying for Medicaid and SSI benefits is restricted to those with limited resources and income. An inheritance, excess income, and financial gifts can make eligibility difficult if not impossible. A special needs trust can help solve that problem.

For example, parents who leave funds in a special needs trust for a disabled child avoid the child’s disqualification of benefit eligibility since such funds are not left directly to the child. Instead, the funds in the trust are controlled and managed by the trustee. 

Are there additional benefits to setting up a SNT? 

Enhancing a disabled person’s quality of life and providing financial support during their lifetime are the main reason many people set up SNTs. They allow the ability for beneficiaries to still qualify and receive needs-based SSI and Medicaid benefits provided they are used for needs not paid for by government benefits. It can, however, pay for needs such as caregivers or transportation expenses. 

Trustees of these trusts have a fiduciary duty to act according to the beneficiary’s best interests and as such provide safeguards from financial abuse. This provides peace of mind knowing the distribution of funds will be allotted as governed by the trust. In some cases, the special needs trust may also protect funds from creditors or those awarded lawsuits.

What are the types of special needs trusts? 

How you fund your trust will determine the type of trust to set up. Here are two common types of trusts that are created to benefit a disabled individual:

First Party or Self-Funded Trust

This type of trust is funded using the beneficiary’s own funds/assets, whether earned or part of an inheritance. The assets in this type of trust originally belonged to the disabled individual before funding the trust. It can be set up by a family member, guardian, court, or the beneficiary themselves if they are mentally competent. 

The first-party special needs trust provides a shelter for income and assets to stay within certain limits established by Medicaid. Such a trust must be established solely to benefit the disabled individual (beneficiary) and upon the beneficiary’s death or trust termination (whichever comes first) must reimburse Medicaid. Any remaining funds would then go to other beneficiaries who are listed.

In order to qualify for this type of trust, the beneficiary must be disabled, and the trust is required to be irrevocable. Under federal law, the beneficiary must be under 65 years of age “when the trust is created and funded.” You may choose a self-funded trust if you become disabled and hold existing assets or received an inheritance or settlement and want to ensure you will be eligible for government benefits. 

Third-Party Special Needs Trust

The most commonly used SNT is the third-party special needs trust, which is funded by an individual (parent, family, or guardian) other than the beneficiary. It should serve as an enhancement to government benefits and not as a replacement. 

This type of trust gives the trustee control of the funds and how they are distributed. In addition, it allows you to appoint secondary beneficiaries. These secondary beneficiaries can be appointed to inherit the remaining funds upon the original beneficiary’s death. Unlike the self-funded or first-party SNT, there is no required Medicare repayment with this type of trust as it is funded with third-party assets.

A supplemental needs trust, therefore, is a type of special needs trust that complies with state and federal laws that is commonly used for beneficiaries seeking government assistance eligibility for benefits like long-term nursing and home care benefits. 

Both of these types of special needs trusts help individuals with mental and physical disabilities keep their qualifications for important governmental health care benefits and protect their assets at the same time. The term “special needs” points to why these trusts were created with the purpose to help with the financial needs of the disabled person. “Supplemental needs” indicate the need to supplement government benefits.

In deciding which type of special needs trust will benefit you or your family member, it’s best to consult an attorney to be sure the greatest number of benefits are secured.

How do I fund a special needs trust?

You are allowed to include as many income and assets in a special needs trust as there are no limits to the amount of funds. The idea is to fund as much as the beneficiary will need for their care. However, special needs trusts are regulated by each state on how these funds can be used.

Most states allow funds to be used for needs that the government benefits do not cover. These supplemental needs can include medical equipment and procedures, legal costs, and living expenses.

There are a variety of ways you can fund your SNT trust including assets like:

• Bank accounts, savings, or investment accounts 
• Life insurance policy
• Award settlements
• Retirement accounts
• Family or vacation home
• Financial gifts
• Inheritance

Before you proceed with setting up a trust, you should consult with an attorney, financial advisor, or tax professional on applicable taxes and fees. 

Are there any alternatives to SNTs?

An alternative to setting up a trust fund is for individuals and families to contribute to an ABLE account, which is a tax-advantaged savings account designed to fund expenses associated with a person’s disability.

In addition, you should look into the Pooled Trust as another alternative to an SNT. For information on how a Pooled Trust can help, contact https://ktstrust.org/old-contact/ 

About the author, Carlos Nath:

Carlos Nath is the Senior Trust Advisor with KTS Pooled Trust. As a seasoned professional with over four years of experience in the New York pooled trust space, Carlos has helped thousands to enroll and set up their accounts with KTS. He is proficient in understanding the Medicare process and provides assistance in clarifying what clients may need. Previously, Carlos worked with a Medicaid consulting firm as an advisor who helped clients who were seeking Medicaid assistance.