by Michael B. Bridges; Dobson, Jones, Ball, Phillips & Bridges, P.A., Attorneys at Law
A special needs trust is a trust created for an individual who has special needs. The primary reason for the special needs trust is to provide a fund of resources for the special needs individual while simultaneously allowing such person to continue to receive benefits available from government programs. If drafted effectively, the funds in the special needs trust will not be considered countable assets for the special needs individual regardless of the amount of assets held by the trust. Stated a bit differently, the Trust assets will not dis-qualify him or her from receiving government benefits, typically Supplemental Security Income (SSI) or Medicaid.
As with all trusts, a special needs trust has three parties, the creator of the trust, often referred to as the grantor or settlor, the trustee, and the beneficiary. The trustee is the individual or entity that manages the assets held by the trust and makes distributions according to the terms of the trust. The beneficiary is an individual that may be entitled to a distribution from the trust.
Distributions from special needs trust must be within the discretion of the trustee. However, distributions by the trustee can be made for a variety of items, including medical treatment, medical equipment, special aids, education, computers, travel expenses, vacations, funeral and burial expenses. In most cases, it is not advisable for the trust to make distributions of cash to the beneficiary or to make distributions on behalf of the beneficiary for the beneficiary’s shelter or clothing.
In general, there are two types of special needs trusts, the first party special needs trust and the third party special needs trust. These trusts are distinguished by who owns or contributes the assets to the trusts.
The first type is the first party special needs trust. With this trust, the person with special needs contributes his or her assets to the trust. Usually, these funds come from past savings, an inheritance or an accident settlement.
A first party special needs trust has a payback requirement. Upon the death of the special needs individual, any remaining assets in the trust must be paid back to the government for its expenses incurred on behalf of the special needs individual. It is quite unusual for the government to receive full reimbursement, so the first party special needs trust remains a “good deal” for the special needs individual. The first party special needs trust also has an age requirement. The special needs beneficiary must be under age sixty-five when the trust is established. The first party special needs trust must also be irrevocable.
A third party special needs trust is funded with the assets of someone other than the person with special needs.Usually, it is funded by a parent, grandparent or other relative. The third party special needs trust does not have a payback or age requirement. Therefore, upon the death of the special needs trust beneficiary, any remaining funds can be distributed to anyone or a charity. There is no reimbursement requirement to pay anything back to the government.
Accordingly, the third party special needs trust has considerable advantages over the first party special needs trust. If a parent has a child with special needs, it is better to establish the special needs trust with the parent’s assets during life or at death before the funds belong to the special needs individual to avoid the payback and age requirements.
How do special needs trusts benefit seniors? Many seniors have a child or grandchild that has special needs. A senior can provide for that child or grandchild through a properly drafted special needs trust as part of their overall estate plan. They can augment the special person’s resources and help him or her reach their maximum potential.
A senior can also create a testamentary special needs trust for his or her spouse through a Will. The trust can provide for the surviving spouse even if the spouse is receiving Medicaid benefits in a nursing home. A senior can protect and provide for their spouse most effectively in a difficult time.
Finally, a special needs trust can even assist a senior in qualifying for long term care through Medicaid’s nursing home program. If structured properly, the senior may be able to transfer assets to a special needs trust for the sole benefit of the special needs individual without incurring a penalty. This is an important exception to the transfer for assets penalty.
Each family is different and each special needs individual has his or her own unique desires and abilities. If you are interested in finding out whether a special needs trust should be part of your estate plan, I recommend meeting with an attorney experienced and qualified in drafting special needs trusts.
