Special Needs Trust are often misunderstood and frequently overlooked methods available to protect assets for disabled persons. In this issue we discuss Special Needs Trusts and how they should be a critical part of many estate plans.
A Special Needs Trust is a type of trust designed to protect assets for a person with a disability. The disabled person typically receives governmental benefits like Medicaid or Supplemental Security Income (SSI). The assets protected by the Special Needs Trust are used to supplement, but not replace his or her governmental benefits. The failure to properly use the trust assets could result in reduction or elimination of the beneficiary’s government benefits. The allowable uses of the Special Needs Trust assets include special education, entertainment, caregivers, etc. In order to understand Special Needs Trusts, it is critical to distinguish between the two types of Special Needs Trusts.
First Party Special Needs Trust
A first party or self-funded Special Needs Trust contains assets belonging to the person with the disability. An example of when a first party Special Needs Trust would be necessary is when a disabled person who is a Medicaid and/or SSI recipient subsequently receives an inheritance or settlement from a lawsuit. In the absence of a Special Needs Trust, the disabled person would no longer be eligible for SSI or Medicaid benefits if their countable assets exceeded $2000. The first party Special Needs Trust must be created by a parent, grandparent, legal guardian or court for a disabled person who is less than age 65. It also must provide that upon the death of the disabled person, the state will be reimbursed from the trust any medical benefits paid. This is a “payback provision” and it is designed to ensure that the state will be paid back if there are assets remaining in the Special Needs Trust upon the disabled persons’ death.
Third Party Special Needs Trust
A third party Special Needs Trust contains assets belonging to someone other than the disabled person. An example would be a parent or guardian establishing a Special Needs Trust to hold their own personal assets for a disabled child or grandchild. Typically, this would involve a Special Needs Trust being established as a part of their will or revocable trust or as a separate, stand alone trust. Unlike the first party Special Needs Trust, there is no age 65 limitation. Anyone can establish a third party Special Needs Trust and the state need not be paid back upon the death of the disabled person.
A Special Needs Trust can be an extremely valuable tool for protecting assets for disabled persons. Too often, instead of utilizing a Special Needs Trust, the parents of a disabled child will disinherit their loved one. This sadly leaves the disabled person with only his or her very minimal government benefits. To make sure your disabled loved one is taken care of, consult with an experienced elder law attorney.