What is a trust?
In general, a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another. A trust divides the legal ownership from the beneficial ownership.
What makes a special needs trust different from other trusts?
A special needs trust is a trust designed for a beneficiary who is disabled, either physically or mentally. First-party special needs trusts are more restrictive than third-party special needs trusts and must include provisions for a Medicaid payback upon the death of the beneficiary. In both first-party and third-party special needs trusts, the beneficiary cannot serve as trustee and has no control over the trust funds or the trustee. A properly-drafted and properly-administered special needs trust will not count as a resource for most needs-based government programs such as Supplemental Security Income (“SSI”) and Medicaid. However, special needs trusts have very specific language requirements which must be reviewed by the government agencies in order to be determined as a “non-countable resource.”
Why should I leave inheritance to a special needs trust?
Oftentimes, family members and friends want to give money and other assets to individuals with special needs. This generosity can sometimes actually prevent the individual from qualifying for or maintaining eligibility for essential needs-based government benefits such as SSI and Medicaid. However, funds left to a properly-drafted and properly-administered special needs trust do not count as a resource for most needs-based government programs, and provide a source of support to supplement government benefits and enhance the standard of living for an individual with special needs.
When should a Special Needs Trust be established?
Ideally, you should create a special needs trust when the beneficiary is young (there is no minimum age for the beneficiary in order to have a special needs trust established for him or her). Having the SNT in place allows for gifts, inheritances and unexpected lawsuit settlements to all be sent to the trust without worrying about jeopardizing eligibility for government benefits. Most families with loved ones with disabilities create a SNT as part of their estate planning process. Generally, a SNT should be established no later than the beneficiary’s 65th birthday.
Who can establish a Special Needs Trust?
A third-party trust can be established by anyone other than the beneficiary. Typically, a third-party SNT is established by a family member to leave property through his or her estate plan for the beneficiary, but the person creating or giving money to the trust does not have to be related to the beneficiary. A first-party trust must be created by a parent, grandparent, guardian, court, or mentally and legally competent beneficiary. It is important to talk to an experienced special needs planner because a poorly drafted trust can be subject to “invasion” by government agencies. These trusts are complicated documents, but Alison Packard specializes in helping families with loved ones with disabilities and has substantial experience in drafting special needs trusts. She would love to help.
What can a special needs trust pay for?
A trustee can distribute trust funds to pay for non-food and shelter items, such as clothing, dental care, hair and nail care, cell phones, computers, transportation costs, recreational activities, vacations, hobbies, pets, education expenses, etc. Special needs trusts can sometimes pay for food and shelter items if the beneficiary does not receive SSI benefits or is willing to receive less money in monthly SSI payments.
Our family is wealthy. Do we still need to create a special needs trust?
Yes. A special needs trust will protect your loved ones with special needs from potential creditors. For example, if your child with disabilities is sued in a personal injury action, the assets in the trust would not be available to the plaintiffs. Additionally, a special needs trust will allow you to use your money for supplemental purposes for your loved one which will allow them to live a fuller life. Otherwise, you will use most of your money paying for extremely expensive private care benefits.
What is the difference between a Third-Party Trust and a First Party Trust?
The first major difference is where the funds come from. In a third-party trust, the funds belong to a third party, or anyone other than the beneficiary. In contrast, a first-party trust is funded by assets that the beneficiary owns outright (such as court awards or inheritances given before a third-party trust was established).
The second main difference has to do with what happens to left-over assets in the trust after the beneficiary passes away. First-party trusts are subject to what is called a Medicaid payback provision, meaning any remaining assets in the trust left over after the beneficiary has passed away must first be used to reimburse their state’s Medicaid program up to the amount of the beneficiary’s total lifetime Medicaid payments. This typically drains out the rest of the trust’s assets. In contrast, a third-party trust is not subject to a Medicaid payback provision, so the remaining assets can be distributed to people or charities determined by whoever created the trust. Typically, the remaining assets are given to family members or charities that provided disability services to your loved one with special needs.
What Type of Special Needs Trust is Preferred?
Under the umbrella of SNTs, there is usually not an option between third and first-party trusts. A third-party trust has more benefits than a first-party SNT, but if a beneficiary receives his or her own money, a first-party SNT must be made to hold those assets. The decision between pooled and non-pooled SNTs depends on the situation of the family or individual looking to create the trust. Many people like a non-pooled trust because it is more individualized to the needs of the beneficiary. Additionally, designating a family member or friend is comforting to some people because they feel they will give them more attention than a professional would. However, some people may not have family members or friends they feel comfortable giving access to the trust, or they might feel more comfortable having an experienced trustee manage the trust. In this case, a bank or financial institution can be designated as the trustee for a non-pooled trust. Yet, non-pooled trusts, especially those managed by a professional trustee, are substantially more expensive than a pooled trust. Thus, pooled trusts may be the best options for many families unable to afford a personalized non-pooled SNT.
What is the difference between a pooled and non-pooled special needs trust?
A non-pooled, individual special needs trust is established by someone for the benefit of a specific beneficiary who is often a family member. A pooled trust is created by a non-profit organization that pools together assets from multiple beneficiaries, creating sub-accounts within the larger trust. In a pooled trust, assets from one donor or beneficiary may be minimal, but because pooled trusts include contributions from many beneficiaries, the trust is able to make stable investments and provide additional management services that a non-pooled SNT might not be able to afford. This group trust, sometimes known as a community or master trust, is substantially less expensive than a traditional non-pooled special needs trust. However, it is also less individualized to the needs of the beneficiary than a non-pooled trust.
What can an ABLE account be used for?
ABLE account funds can pay for “qualified disability expenses” such as, but not limited to, medical treatment, education, transportation and housing for the individual with disabilities. Contributions to an ABLE account are not tax-deductible, but all investment earnings are untaxed if the funds are used for appropriate qualified disability expenses.
How is an ABLE Account different from a Special Needs Trust?
While both ABLE accounts and special needs trusts (SNT’s) are excluded resources for public benefits determination purposes, there are many differences between an ABLE account and a SNT. Unlike a special needs trust, an ABLE account has no requirement of trustee management, which allows for more independence for your loved one with disabilities. The age requirement is different, as beneficiaries of a first-party SNT must be disabled before 65 years old, and ABLE accounts require the individual to be disabled before the age of 26. Additionally, funds in an ABLE account can be used for food and shelter, while those from a SNT strictly cannot be used for basic living needs such as food and shelter. One of the biggest differences is that ABLE accounts have an annual contribution cap of $15,000 and a total balance limit of $100,000, while SNT’s have no amount limit that can be held in the trust.
Fortunately, SNTs and ABLE accounts are not mutually exclusive. Many people decide to use a third-party SNT to leave hefty amounts of assets for their loved ones with special needs through estate planning according to instructions in the trust, and they use an ABLE account as a secondary tool for protection against losing government benefits due to small gifts or inheritances the beneficiary might accrue during his or her lifetime. For example, if a beneficiary receives a small amount (less than $15,000) of unexpected money, such as a birthday gift misguidedly given directly to the beneficiary instead of a third party SNT, a small litigation settlement, or a lottery prize, the beneficiary can easily put this money in an ABLE account and does not have to worry about jeopardizing his or her benefits or creating a first-party SNT for that one lump sum of money.
When deciding how to best use SNTs and ABLE accounts for an individual with special needs, it is important to consult with a special needs planning attorney about the specificities of your case. Every person or family is different, and the decision for how to use these tools can be complicated. Alison Packard can help you walk through the necessary steps and questions to consider when making this decision.
Have more questions? Contact us today.