Basics of Special Needs Trusts
A special needs trust, also known as a supplemental needs trust, is created generally through a standalone legal document, although it can be incorporated in a will. Special needs trusts are used to hold assets for the disabled child beneficiary for their limited use.
If you need help planning your estate so that it best benefits your special needs child, please call (800) 462-5772 to speak with an attorney at Stern Law, PLLC today.
Types of special needs trusts
Assets within the trust can be used to purchase a home, cover medical services not offered by Medicaid, travel, recreational, and cultural experiences, just to name a few. There are three main types of special needs trusts:
- A first party special needs trust
- A pooled special needs trust
- A third party supplemental needs trust.
Each of these various trust models will be discussed in detail below.
First party special needs trust
A first party special or supplemental needs trust is also known as a self settled trust because it is funded by the disabled individual themselves. This trust is created to protect a disabled minor or adult child’s current or future receipt of government benefits if the individual is about to receive monies in excess of $2,000. Most commonly, this type of trust is set up for those receiving a personal injury settlement or an inheritance from a relative who was unaware of the potential consequences of providing for the disabled individual in his or her will or trust.
The first party special needs trust must be established by a parent, legal guardian, grandparent, or the court. The disabled individual must be under the age of 65 and meet the definition of disabled according to the Social Security Act. Additionally, this form of special needs trust is subject to a Medicaid payback provision. This requires the trust to reimburse the state Medicaid agency for monies expended on behalf of the beneficiary throughout their lifetime upon the death of the beneficiary. However, this provision only extends to the value of the trust on the day of the beneficiary’s death, so use of the assets during the beneficiary’s lifetime can avoid the payback. The trust must also be irrevocable.
Pooled trusts
Pooled trusts are also funded by the trust beneficiary. They are frequently used where the settlement or trust received by the disabled child is small, making a first party special needs trust a poorer option. This form of trust can also be used where there is no parent, guardian, or grandparent to establish the trust. Pooled trusts are created and managed by nonprofit organizations. The assets in the trust are pooled together for investment purposes, but a sub account exists for each beneficiary.
Third party supplemental needs trust
Third party special needs trusts are funded by anyone other than the trust beneficiary, and most often are contributed to by parents, relatives, and friends. A special needs trust of this type allows parents to provide for their disabled children after their death, as well as during their lifetime. Additionally, unlike the first party special needs trust, there is no Medicaid payback requirement for third party supplemental needs trusts.
This trust can be either testamentary, created under a will, or inter vivos, created during lifetime. An inter vivos trust can be made revocable, allowing for easy changes to appointment of the trustee, for instance.
What expenses can a special needs trust cover?
Special needs trusts have limitations. They cannot pay for the disabled minor or adult child’s basic needs and medical care covered by government assistance. Therefore, generally, the trust cannot cover basic medical care or food, and might not be able to be used for shelter.
A special needs trust can pay for any sort of supplemental needs of the disabled child, which can include:
- Clothing
- Computers
- Transportation
- Vacations
- Summer camps
- Restaurant meals
- Activities
- Attorney’s fees
- Furniture
- Medical treatments not covered under Medicaid
A special note on selection of the trustee
The trustee of your special needs trust has a rather complex and demanding role. They must be able to prudently invest the funds in the trust, advocate for your child’s entitlements, monitor all services provided, and share an in-depth knowledge and understanding of your child’s disability. It is important to give great consideration to the naming of the trustee. Given the demanding nature of the task, it is often recommended that two trustees be named—one relative or friend and one professional, such as a lawyer or banker. This method often maximizes the trust’s overall success.
Careful estate planning can mean the difference between a lifetime of struggles and years of continued support for your special child. For help finding an estate planning attorney with experience in the field of special needs, or for more information on your estate planning requirements, please contact Stern Law, PLLC online or call (800) 462-5772 today.
