Anatomy of a Special Needs Trust and Its Relevance to Your Practice

special needs trust
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A special needs trust is a trust established for the benefit of an individual with special needs to supplement any benefits that an individual may receive from government programs. In general, the assets of a special needs trust are not treated as countable assets against the beneficiary for means-tested public benefits, commonly referred to as the special needs trust exception, such that the beneficiary can have the best of both worlds to support their special needs, public benefits and trust funds. There are three main types of special needs trusts: the first-party trust, the first-party pooled trust, and the third-party trust.

A First-Party Special Needs Trust (commonly referred to as a “Medicaid payback trust”, “d(4)(a) trust” or “under age 65 special needs trust”) holds assets that belong to the person with special needs, such as an outright inheritance or settlement proceeds. This trust is established for a disabled individual seeking to protect her own eligibility for government benefits, including SSI, Medicaid and others. To qualify for the special needs trust exception, the trust must be established for the benefit of a disabled individual, who is then under age 65. A first-party special needs trust must be established through the actions of the beneficiary’s parent, grandparent, legal guardian (not conservator, in Arizona), or a court, and thereafter properly funded. At the beneficiary’s death, the trust must payback to the state(s) an amount equal to the medical assistance paid on behalf of the beneficiary under the state Medicaid plan(s). The trustee may be an individual or corporate trustee. 42 U.S.C. 1396p(d)(4) (A) governs first-party special needs trusts.

A Pooled Trust is an alternative to the first-party special needs trust. A pooled trust is established and administered by a nonprofit organization, and holds funds from many different beneficiaries with special needs. These trusts allow beneficiaries to pool their resources for investment purposes with a corporate trustee, while still maintaining separate accounts for each beneficiary’s needs. When the beneficiary dies, the remaining funds will be reimbursed to the state(s) for medical assistance paid on behalf of the beneficiary, but a portion may go toward the nonprofit organization responsible for managing the trust. Unlike the first-party trust described above, this trust is for those, regardless of age, who are disabled. However, persons over age 65 may be subject to government program penalties, depending upon circumstances. The account may be established through the actions of the individual, parent, grandparent, legal guardian or a court. 42 U.S.C. 1396p(4)(4)(c) governs pooled trusts.

A Third-Party Special Needs Trust (aka supplemental care trust) holds funds or assets belonging to other people (e.g., parent or grandparent) who want to help the individual with special needs and is most often used as part of the third party’s estate plan. This trust may be established during the lifetime of the third party, or upon their death. The third-party trust functions like a first-party special needs trust, in that the assets held in the trust do not affect an SSI or Medicaid recipient’s access to benefits and the funds can be used to pay for the beneficiary’s supplemental needs beyond those covered by government benefits, and provides creditor protection. But a third-party special needs trust does not contain the payback provision found in first-party trusts. This means that when the beneficiary with special needs dies, any funds remaining in her trust can pass to other family members or to charity without having to be used to reimburse the government.

The following are typical examples of when a special needs trust may be warranted:

Davis Miles Referral
  •  Your client has special needs, receives means-tested public benefits, and anticipates settlement proceeds (e.g., personal injury or medical malpractice claim).
  •  Your client has special needs or is the parent of a minor child with special needs, who receives means-tested public benefits, and issues of division of property, alimony and/or child support will affect them in a divorce proceeding.
  •  Your client needs Medicaid long-term care benefits themselves, and has a disabled child.
  •  Your client serves as personal representative or trustee of an estate from which a distribution shall be made to an individual with special needs.
  • Your SSI or Medicaid recipient client is presently entitled to an outright distribution from an estate, trust or non-probate transfer.
  • Your client has a loved one with special needs, for whom they wish to provide for in their estate plan.

Of course, every person with special needs is different, which means that every special needs trust is going to be different. The only way to determine which type of special needs trust is right for your client or their family is to meet with a qualified special needs planning attorney. Stephanie A. Bivens

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