OWM Blog – What is a Special Needs Trust?

Special needs trusts (also known as “supplemental needs” trusts) are an important component of planning for an individual with a disability. A special needs trust allows a disabled beneficiary to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose his or her eligibility for certain government programs, such as Medicaid or Supplemental Security Income (SSI). Special needs trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining his or her eligibility for public benefits.

Distributions from a special needs trusts cannot provide basic support. Instead distributions from a special needs trust are to pay for supplemental items. Examples of items that a special needs trust may pay for include education, entertainment, vacation, hobbies, and medical care beyond the simple necessities of life.

There are two different types of special needs trusts. There are First-Party Special Needs Trusts and there are Third-Party Special Needs Trusts. There are also pooled special needs trusts.

First Party Special Needs Trusts:
This type of special needs trust is most commonly used where a person with a disability receives an inheritance or a settlement or award from the court. This type of trust can also be used where an individual later becomes disabled in life but had acquired assets prior to the disability. A first-party special needs trust is funded with assets owned by the individual that has a disability. To be eligible to create a first-party special needs trust, the individual must meet the definition of “disabled” per 42 U.S.C. Section 1382c(a)(3)(A), i.e. Additionally, the individual with the disability must be under the age of sixty-five (65) at the time of the creation and funding of the special needs trust.

A first-party special needs trust can be established by the individual with the disability, the parent or grandparent, the legal guardian of the individual, or by a court. A first-party special needs trust must be irrevocable and must be approved by the Department of Human Services (DHS) and by the Social Security Administration (SSA).

Upon the death of the beneficiary of the trust, the state is reimbursed from the remaining assets in the trust to the extent that the beneficiary received Medicaid benefits. This reimbursement to the state is often referred to as a “pay-back” provision.

Third Party Special Needs Trusts:
A third-party special needs trust is created on behalf of an individual with a disability with the funds from someone other than the individual with a disability. A third-party special needs trusts does not need to be irrevocable at the time of creation to preserve the beneficiary’s eligibility for benefits. The primary advantage of the third-party special needs trust is that there is no “pay-back” provisions. This means that upon the primary beneficiary’s death, the trustee is not required to use the remaining assets in the trust to pay-back the state for the Medicaid benefits received by the beneficiary during his or her lifetime. Rather the creator of the trust can designate a remainder beneficiary. Upon the death of the primary beneficiary, the creator of the trust can name who will receive the remaining funds in the trust.

Pooled Special Needs Trusts:
A pooled special needs trust can be either first-party or third-party. Pooled special needs trust are established and administered by a non-profit association. There is a master trust agreement, and then separate joinder agreements for each beneficiary joining the master trust. The main idea of a pooled special needs trust is that the assets of the pooled trust are for the benefit of multiple beneficiaries. Separate accounts are maintained for each beneficiary; however, the assets are pooled together for management and investment reasons. Unlike the third-party supplemental needs trust, a remainder beneficiary cannot be designated.

Conclusion:
Special needs trusts are an important planning tool for individual’s with disabilities. Special needs trusts are complex and must be drafted properly. If you have questions regarding Special Needs Trusts, or to discuss which type of Special Needs Trust is best for your situation, please contact Rebecca A. Hobbs, Esquire, CELA via telephone at (610) 323-2800 to schedule a special needs planning consultation.

— Written by Rebecca A. Hobbs, Esq.

DISCLAIMER: The contents of this blog are not legal advice, and are not to be used for that purpose. If you are faced with a legal matter, you should contact a lawyer immediately in order to ensure that you are protected.