As Ms. Andrews sang in The Sound of Music, “let’s start at the very beginning, a very good place to start….” So, before learning about Special Needs trusts, let’s start by learning about trusts in general. There are many kinds of trusts, all of which are separate legal entities (sort of like a company is a separate legal entity) that can hold and manage assets. A trust typically involves four important parties. First is a “Settlor.” The Settlor is the person who creates the trust. Second is a “Grantor.” The Grantor is the person who initially contributes assets into the trust. Next are the “Beneficiaries.” This is the person or persons who will benefit from the assets placed into the trust. Last is the “Trustee.” This is the person in charge of managing the trust for the benefit of the beneficiaries. It is important to note that one person can hold multiple roles.
Okay. Now that we understand what a trust is, we can move on to a special needs trust. Although there are different types of special needs trusts, they are all designed to hold and manage assets for a person with disabilities in a way that will still allow them to receive public benefits (like Supplemental Security Income[SSI], Medicaid or public housing) that are only available to those who have very limited resources. There are three main types of special needs trust: third party, first party (sometimes also called “self-settled”), and pooled.
Third party special needs trusts are created by someone other than the disabled person and can hold any kind of asset imaginable. Anyone other than the disabled person can contribute assets to the trust. These assets are then used by the Trustee to provide things for the disabled person’s welfare that public benefits cannot provide. This can be anything from specialized medical equipment to educational costs, to travel. If the disabled person dies before all the trust assets are used, the trust will provide instructions as to who should receive the remaining money.
First party special needs trust are very similar to third party special needs trusts except that the disabled person can contribute their own money to this kind of trust. First party special needs trusts are often created to deal with litigation settlements or inheritances received by a disabled person. Unfortunately, a disabled person cannot be the Settlor (or creator) of their own trust. The trust must be created by a disabled person’s parents, grandparents or by the court.[*] There are two other important differences between third and a first party special needs trust. The first is that the beneficiary must be under 65 when the trust is created and funded. The second is that if all the funds in a first party special needs trust are not used up before the beneficiary dies, the state will receive payback for monies they have expended through Medicaid for the disabled person’s health care and support.
A Pooled trust is an alternative to a first party special needs trust. Essentially, a non-profit organization sets up a trust that allows multiple beneficiaries to pool their funds for management and administration efficiency while separate accounting is maintained for each individual’s funds. When the beneficiary dies, any of their remaining funds pay back the state for care provided, but a portion also goes toward the non-profit managing the trust.
If you believe that you or a loved one could benefit from a special needs trust, we encourage you to make an appointment with our office to learn more. As always, thanks for reading.
[*] Common consensus is that this flaw in the law that authorized first person Special Needs Trusts was simply the result of a drafting error when the legislation was in the final stages of drafting. There is a bill currently before congress called the Special Need Fairness Act to correct this long standing problem and you can find out more at www.naela.org/NAELADocs/NAELA%20_tatement_for_Record_SNTFA_EC_Subcom%20Health_09_18_15.pdf .