Special Needs Trust

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The purpose of a special needs trusts is to provide a disabled person with income in addition to government assistance, such as Supplemental Security Income (SSI) and Medicaid, to pay for special (not basic) needs. Assets in the trust do not count against the eligibility limits for governmental support. As can be imagined, the correct drafting of such a special needs trust is very important, otherwise governmental assistance or income, even principal, may be lost.

What are the two types of special needs trusts (SNTs)?

Third-party SNTs and first-party SNT, also referred to as a “self-settled” trusts. Third party SNT’s are trusts that are funded with assets from a source other than the beneficiary, such as gifts, an inheritance or proceeds from a life insurance policy. A first-party SNT is funded with assets or income that belong to the disabled person who is also the beneficiary of the trust. Special rules apply to the latter (see below).

What are some important provisions in a special needs trust?

First off, no cash payments should ever be made to the beneficiary. Instead the trustee disburses money directly to the vendors that provide for the special needs of the beneficiary. Second, disbursements of income or principal are entirely discretionary with the trustee. Protective wording should stipulate that the trust is to expend income or principal after federal state and local public assistance has been received and is being used for the benefit of the beneficiary. Likewise, a spendthrift clause may add additional protection to avoid attachment of trust property by court order in an attempt of the government to recoup assistance payments. An independent professional trustee or a corporate trustee may withstand allegations of collusion with the beneficiary better than a family member.

What are the requirements for a self-settled (first party) special needs trust?

As stated above, a self-settled special needs trust is funded by the disabled beneficiary. The assets could come from from an inheritance personal injury settlement. To preserve Medicare (SSI) or Medicaid eligibility, the trust beneficiary must be disabled according to Social Security definitions, who is under the age of 65 years at the time the trust is established. Further, the trust must provide that any funds remaining at the beneficiary’s death must be repaid for the government benefits received.

See also:
Your special needs trust defined
Strategies for funding a special needs trust
Standby Trust
Trusts – A general overview

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