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Special Needs Trust

Sometimes parents or grandparents set up trusts to benefit children or grandchildren, but when beneficiaries have special needs, a standard trust may not fill the bill. Generally, trusts are appropriate for transfers to minors since they protect the assets until the minor can handle the funds independently.  However, if a loved one has a mental or physical disability, family members may want to set up a Special Needs Trust or Supplemental Needs Trust (“SNT”) which can serve certain additional purposes.

Why wouldn’t a regular trust, with all the attendant directives and safeguards, work just as well as a SNT? The Answer is that if the disabled person is receiving or expects to receive governmental support in the form of Supplemental Security Income (SSI) or Medicaid, those benefits can be lost if income is received from a regular Trust. A Special Needs Trust circumvents those rules and allows the beneficiary to receive supplemental income or benefits while still keeping public assistance.

There are two types of Special Needs Trusts. A First Party SNT is typically created by the beneficiary’s parent, grandparent, guardian/conservator or court of law because the beneficiary does not have the legal capacity to set up the trust. It is funded with assets of the beneficiary. A Third Party SNT, which is preferable in that it is more protected and has additional tax benefits, is created by a third-party settlor utilizing the third-party settlor’s assets to fund the Trust for the beneficiary. Typically, an SNT is set up as a Third Party Trust, and if the beneficiary wants to contribute his or her own income or assets to an SNT, he or she can set up a separate First Party Trust. If properly created and administered, an SNT has several desirable effects for a disabled person who is receiving Supplemental Security Income (SSI) or Medicaid benefits. First, the funding of the trust will not result in a period of ineligibility for these government benefits.  Second, the trust is not a countable resource for eligibility purposes. Both First Party and Third Party Trusts have different legal requirements, so check with an attorney before determining which Trust you should create.

Anyone who has a permanent or temporary physical or mental impairment, or may have such an impairment in the future, can qualify to be the beneficiary of a Special Needs Trust. Some more common disabilities are: blindness, developmental disabilities, Down syndrome, chronic mental illness, paralysis, autism and addictions. This, however, is not an exhaustive list.

When setting up an SNT, you might consider calling it a Discretionary Trust or just a Trust, rather than a Special Needs Trust. Make sure to name a settlor, a trustee, and a successor trustee, and once signed and authorized by the IRS, you can begin adding cash and other assets to the Trust’s account. Trusts can be funded by: wills, living trusts, real property, personal property, and other sources allowed by law. When deciding how much to contribute to the SNT, or how best to manage it, an attorney can help you make those tough decisions.

Likewise, there are many restrictions regarding contributions to SNTs. For example, certain contributions to a third-party SNT can actually decrease or make a beneficiary to an SNT ineligible for SSI or Medicaid Payments. Restrictions such as these make it vital that any person interested in setting up an SNT should consult with an attorney in order to navigate the rules surrounding SNTs.

The Trustee of the SNT has essential control over the funds contributed into the SNT. The Trustee has the duty to act honestly and address the needs of the Trust beneficiary first. The Trustee must follow the rules set forth in the Trust Agreement while keeping the beneficiary up-to-date on finances and distribution of assets. If the work seems difficult, multiple Trustees may be appointed to manage the Trust.

The Trust Agreement sets forth the provisions that govern how the Trust is used and managed. The Trust Agreement lays out the title, names of the parties, the philosophy of the Trust, and other powers granted to the Trustee. When writing the Agreement, certain provisions must be included. A provision stating the Trust is not revocable by the beneficiary makes it crystal clear that the beneficiary has no control over the Trust. Specifically state that it is the intention of the Settlors to solely supplement public benefits through the Trust and not to supplant them. Lay out what type of needs will be covered by the Trust and how funds may be used or distributed. It’s also important to include a process for when the Trustee will no longer be the Trustee, and how the transition occurs. Once again, seeking legal advice will greatly help with these requirements.

Lastly, every SNT should contain a detailed explanation of the philosophy of the trust. What do the settlors really wish for the beneficiary?  How should the beneficiary grow and develop, and what kind of lifestyle should the beneficiary lead?  This provision can be as detailed as necessary, including directions such as whether or not the beneficiary should have pet therapy, continue certain hobbies or participate in certain institutions.  Bear in mind that determining what a trustee must pay for and what he should pay for may require careful consideration.  The creators of the trust should also be sensitive about language.  For example, avoid phrases like “suffers from.”  An experienced attorney can help cover all of these important considerations.

For more information or for help getting a special needs trust set up for you or a loved one, please reach out to us on our Contact Us page or by messaging our LinkedIn page.

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Jeffrey M. Manley