Special Needs Trusts

Special Needs Trusts are an Estate Planning technique that shelters assets for a Special Needs Person. The person benefits but does not lose needs-based government benefits.

What Is a Special Needs Trust?

A Special Needs Trust describes an Irrevocable Trust holding assets for a person receiving needs-based government benefits. The person who benefits from the Trust is the “beneficiary.” Typically, the Beneficiary is an individual with physical or mental disabilities who qualifies for needs-based benefits, such as Medicaid. Giving this person money or making them an heir would disqualify them. Congress developed Special Needs Trusts to hold assets for these people without excluding them from benefits. A Special Needs Trust allows you to look out for your loved one by providing them with little extras. You improve their life but don’t harm their benefits.

First-Party Special Needs Trusts

An irrevocable trust, a First Party Special Needs Trust holds a special needs person’s assets. The Trustee uses these assets for the Special Needs Person’s care. But does not disqualify them from needs-based government benefits like Medicaid.

First, Party Special Needs Trusts often hold legal settlements. Other examples include inheritances or divorce settlements. The goal is to continue using needs-based benefits and enjoy the benefits of the new assets. Because these are the SNT person’s assets, unused amounts must be applied to reimburse Medicaid.

Example: George, a Philadelphia resident, becomes a Special Needs Person due to a car accident. He begins collecting Medicaid. Years later, his lawyer obtained a $100,000 settlement. George places the money in a First Party Special Needs Trust. George continues to collect Medicaid. At his death, the SNT still holds $60,000. George used $150,000 of Medicaid benefits. The successor trustee must apply the $60,000 towards the $150,000 “debt.”

Third-Party SNT: Trusts Set Up by the Family

Unlike First Party Special Needs Trusts, Third Party trusts are Irrevocable Trusts funded using other people’s money. If properly drafted, the Trustee can use these funds to provide for the Special Needs Person without disqualifying them from needs-based government benefits such as Medicaid. Because the funds never belonged to the Special Needs Person, at death, any remaining money does not have to be applied to reimburse Medicaid.

Third-Party SNTs are typically created as part of the parent’s estate plan.

Example: Grandpa is a Bucks County, Pennsylvania resident and directs his Estate Planning Lawyer to draft a Will. The Will includes a Third Party Special Needs Trust for Grandson. At Grandparent’s death, the executor funds the Trust. The Trustee can provide for Grandson. Grandson, a Camden County, New Jersey resident, continues to receive NJ Medicaid benefits. At Grandson’s death, the SNT still holds $100,000. This money does not have to pay back to New Jersey for Medicaid use. Instead, it passes outright to the Granddaughter, per Grandparent’s Will terms.

Pooled Special Needs Trusts

Sometimes a Special Needs Person owns assets, but forming a First Party Special Needs Trust is inconvenient or impractical. The funds can be contributed to a Pooled Special Needs Trust in these cases. As the name suggests, the funds are “pooled” with those of other Special Needs people’s resources, creating economies of scale. The professional Trustee manages the funds for the Special Needs person, but at death, the funds must be applied to reimburse Medicare.

Advantages of a Special Needs Trust

• Special Needs Trusts allow the Beneficiary to benefit from Trust assets without being disqualified from needs-based benefits.
• The Trust’s Trustee looks out for your loved one. Because many people with physical and mental disabilities cannot manage money, they need help. A Special Needs Trust allows you to pick someone to help. This helper can be a family member or a professional Trustee. This person then manages the asset for the Beneficiary. Think of the Trust providing your loved one a protective wall. This wall provides shelter from waste, abuse, and theft. While protecting the assets, the Trustee can use the Trust’s funds. They are making your loved one’s life better.
• A Special Needs Trust protects assets from theft, abuse, and waste.
• An additional layer of protection is possible by naming a Trust Protector. This Trust Protector is typically someone who will look out for the Beneficiary but does not wish to serve as Trustee. The Trust Protector can monitor the Trustee with the right to remove and replace the Trustee at any time.

Common Questions Regarding Special Needs Trusts

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Please get in touch with us if you have any questions about Special Needs Trusts or other estate planning topics. Schedule a free consultation. Klenk Law has focused only on Estate Law for more than two decades. We’ve seen it all, and this experience allows us to explain complex estate planning techniques clearly and concisely. We make it easy for you to understand Special Needs Trusts so you can make the best decisions for yourself and your family.