Legal Insurance
What Is a Special Needs Trust?
A special needs trust — also referred to as a supplemental needs trust or SNT — is a type of trust that’s set up for people with disabilities or access and functional needs. It helps provide individuals with financial support without disqualifying them for government benefits, such as Medicaid or Supplemental Security Income (SSI).
How do special needs trusts work?
Needs-based government benefits have specific income and asset requirements that, if an individual surpasses them, can disqualify them from receiving the assistance they need. That means, if you have a child or loved one with a disability, supporting them financially can be difficult to do without impeding their ability to receive government benefits.
By allocating funds and other assets to a trust, you’ll be able to provide help without counting those contributions toward their personal income. Like other trust accounts, a special needs trust includes a grantor (who establishes the fund), a trustee (who manages the account), and a beneficiary (who receives the benefits).
What can a special needs trust pay for?
The funds in a special needs trust can be used for anything the beneficiary chooses. They're commonly used to pay for medical expenses, home care, transportation, and housing costs. Though government benefits may contribute to paying these expenses, they often don’t cover the full amount — but should an individual make enough money to afford the difference, they may no longer qualify for those benefits at all. Using SNT funds can help them fill in those gaps without worry.
Types of special needs trusts
There are two main types of special needs trusts: third party and first party. While third-party SNTs are the most common, there are some instances where a first-party trust makes more sense.
Third-party special needs trust
A third-party SNT is most similar to a traditional trust and is funded by someone who isn’t the beneficiary. This type of trust can be revocable or irrevocable, and it can be set up as a stand-alone or testamentary trust.
A stand-alone trust gives the special needs beneficiary access to assets within it during the grantor’s lifetime. A testamentary trust is one that’s contained within a last will and testament and isn’t funded until the grantor’s death.
First-party special needs trust
A first-party SNT is one that’s funded by the beneficiary. The 2016 21st Century Cares Act states that, if an individual is mentally able, they can set up their own special needs trust account to protect themselves from losing government assistance. This type of SNT can also be created by a loved one and funded using the beneficiary's own assets.
First-party SNTs require an additional step, called a Medicaid repayment provision. This provision stipulates that, after the beneficiary passes away, any remaining assets in the trust will be used to repay Medicaid before being distributed to contingent beneficiaries.
Pooled special needs trust
There’s also the opportunity to take part in what’s called a pooled trust. These types of funds — also called community trusts — are usually administered by nonprofit organizations. Pooled special needs trusts gather funds from multiple families, as well as other donors and community members, and use that money to serve each family. They name individual members as separate beneficiaries within the pooled trust, giving each their own account. A trustee chosen by the nonprofit organization gains control of the fund and is able to act on behalf of each beneficiary.
How to set up a special needs trust
Setting up a special needs trust is similar to setting up any trust fund. Before you start, it’s important to consider your loved one and their wants and needs. You’ll have to assess their current income, what bills and expenses they’ll need help with, and how frequently they’ll need to receive money.
Once you’ve determined your loved one’s needs, you can get started on creating the special needs trust account.
Step 1: Designate your beneficiary
Your beneficiary can be your loved one with a disability or needs that suit the purpose of the trust.
Step 2: Choose a trustee
Often, the grantor (that’s you) will name themselves as the trustee. However, there are some cases in which the beneficiary can also be named trustee. If you’re taking part in a pooled trust, your trustee will likely be the nonprofit organization in charge of the account.
Step 3: Write up and sign your trust documents
While it’s possible to set up a special needs trust on your own, it’s helpful to consult with an estate planning lawyer. These lawyers specialize in trusts and can ensure you’re following all necessary guidelines and rules involved in creating a trust.
When you’re satisfied with the documents you’ve put together, it’s time to sign them. Typically, trusts require two witnesses and notarization — but check with your state’s individual guidelines.
Step 4: Fund your special needs trust
You can fund your trust with money, personal items, real estate, investments, or anything else as you see fit.
Special needs trusts FAQ
Do I need a lawyer to set up a special needs trust?
It’s possible to create a special needs trust without a lawyer, but a lawyer will be able to interpret legal jargon and ensure your trust follows your state’s guidelines.
Who can get a special needs trust?
Special needs trusts can be created by and for anyone. However, it’s important to consider whether there’s any benefit to creating one for your or your loved one’s specific circumstances. Typically, if your loved one qualifies for or relies on government assistance, like Medicaid or SSI, creating a special needs trust could be beneficial.
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