Many people mistakenly believe they cannot leave an inheritance to a special needs relative. They fear causing their loved one to lose desperately needed government benefits. Fortunately, there are ways to give or leave assets to a special needs individual without jeopardizing their benefits. There are also ways to protect funds that a special needs individual receives outright which would interfere with benefits unless properly handled.
What is a Special Needs Trust?
A Special Needs Trust, also commonly called a Supplemental Needs Trust ("SNT") is a trust which holds funds that are used to supplement a disabled person's means-tested government benefits. Means tested programs include SSI, Medicaid, and Community Based Alternatives. Generally the SNT funds cannot be used for medical care, food, clothing or shelter. The SNT funds may be used for any extra items not provided for by government benefits such as vacations, purchase of a residence, special medical treatments, special therapies, educational services, etc.
When is Special Needs Trust Necessary?
A SNT is necessary to maintain a disabled person's government benefits when the disabled person receives funds, or is going to receive funds or other items which would otherwise jeopardize their benefits.
Typical scenarios in which a SNT is appropriate include:
1. Setting up a SNT to hold an anticipated inheritance for a disabled person receiving government benefits. Perhaps you have a disabled child or grandchild and wish to make lifetime gifts to them or include them in your estate plan. This type of SNT can be set up and funded during life or through a testamentary SNT which is contained in your will. The SNT will allow you to give or leave money or other assets to a disabled person without interfering with their benefits.
2. Setting up a SNT to hold funds owned by a disabled person, typically received by inheritance or receipt of funds from a personal injury settlement.
What are the types of Special Needs Trusts?
A SNT may be self-settled or settled by a third party, meaning it may be set up using the disabled person's funds or a third party's funds.
Self Settled Special Needs Trust
A Self Settled Special Needs Trust is a trust funded with funds owned by the special needs individual. These trusts are also commonly called (d)(4)(A) trusts based on the statute which authorizes their creation, 42 U.S.C. §1396p(d)(4)(A). Typically a Self Settled SNT is used to avoid losing benefits when a disabled person receives funds through an inheritance or as a result of a personal injury. A Self Settled SNT must be created by a parent, grandparent, legal guardian or by a court, along with other requirements. The general requirements include:
1. The trust is funded by assets owned by the disabled individual for whom the trust is established;
2. The individual is under age 65 at the time the trust is established;
3. The individual is disabled, as defined by statute;
4. The trust is created by a parent, grandparent, legal guardian, or by the court;
5. The trust includes a repayment provision to the state for all medical assistance provided to the disabled individual.
The trust funds must be used to supplement, not supplant government benefits, meaning the funds should not be used for items covered by government benefits. The Trustee must not make cash distributions to the beneficiary or make distributions for food and shelter.
This type of SNT has several requirements, and if it has to be approved by the court, there is no guarantee the court will authorize creation of the SNT. The primary downside to this type of SNT is the required repayment provision. If there are funds left in the SNT at the end of the beneficiary's life, they must be paid to the state to extent assistance is provided. Thus, if you want to leave an inheritance to a special needs person, it is wise to set up third party settled SNT now, rather than forcing the disabled individual to attempt a self settled SNT, which can be problematic.
Third-Party Settled Special Needs Trust
A Third Party Settled SNT is a tool most commonly used by family members to provide for a disabled relative with out causing the disabled relative to lose their benefits. This type of SNT can be funded during lifetime to help with a disabled person's needs while the settlor is alive or a settlor can bequest funds through their will or a trust that will flow into a SNT for the disabled relative when the settlor passes away.
One benefit of establishing a SNT during life is that other family, such as grandparents, can also utilize the SNT to leave an inheritance to the disabled person via the SNT by naming the Trustee of the SNT as the party to receive the inheritance, or other relatives can simply fund money into the SNT during their lives. An SNT can also be funded with life insurance policies that will pay out to the SNT ensuring it is funded to care for the disabled person when various family members pass. For parents of a special needs child, ensuring their child is cared for after they are gone, is a huge concern. An SNT can ease those fears and ensure there are sufficient funds to provide for the special needs child the rest of their life.
There are lots of planning options for special needs individuals. If you have a special needs loved one, consult an estate planning attorney who can help you make sure your family is protected.
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