A special needs trust can be an excellent tool to help people with disabilities maintain a better quality of life by assisting them in paying for everyday expenses, such as medical care, without affecting their eligibility for public benefits.
The trust is managed by a trustee, who approves all expenditures and holds assets for the use of the beneficiary. In addition, the trustee has specific legally defined duties, including accounting, compliance, confidentiality, protection, and prudence.
First-party Special Needs Trusts
A first-party special needs trust (or “d4A trust”) is a type of estate planning vehicle that uses assets to benefit a disabled individual. These trusts are funded with the beneficiary’s assets and contain restrictive language.
For example, the beneficiary must be disabled, meaning they must have some sort of medically determinable impairment to qualify for benefits. Because the funds are not protected from creditors, a first-party SNT is often the best option.
While many people use the terms first-party and third-party Special Needs Trusts interchangeably, there is a difference between them. First-party special needs trusts are funded using the donor’s funds, often obtained in a personal injury settlement or inheritance. They are subject to “payback” provisions. In addition, they must be financed when the donor-beneficiary is younger than 65.
Pooled Trusts
Pooled trusts combine trusts for several beneficiaries with greater flexibility. Generally, these trusts require the input of several beneficiaries, with the beneficiaries having absolute control over the investment and distribution decisions.
A pooled trust, therefore, tends to be less risky than individual trusts, and the funds in each sub-account are invested more conservatively. In addition, upon the death of the last beneficiary, the remaining funds will be returned to the state as reimbursement for Medicaid payments made during the beneficiary’s lifetime.
A pooled trust can provide many benefits to a disabled individual. It can allow them to shape the use of trust funds while relieving the family of day-to-day administration. Since a non-profit organization administers these trusts, it is critical to do research before committing.
For instance, ask about the organization’s investment relationship and trustee experience. Ensure you’re satisfied with the level of detail of the organization’s reports.
Sometimes, a pooled trust may also be a third-party pooled estate trust, which involves a family member or friend setting up a separate trust for a disabled individual. Funding these trusts depends on the specific type of trust. Assets not owned by the beneficiary fund a third-party pool trust. The fund can come from an inheritance, a personal injury settlement, or life insurance proceeds.
Third-party Special Needs Trusts
The most significant advantage of third-party special needs estate planning is that the assets in the trust do not count against the person’s eligibility for government benefits. A trust’s assets can supplement the beneficiary’s government benefits and pass to a family member if the beneficiary passes away. For SSI and Medicaid eligibility, a belief is ideal. As long as the trust beneficiary is under age 65, a first-party trust can only be established.
The language for third-party special needs trusts can be complex, so it’s essential to consult an attorney for help drafting the proper document. A third-party special needs trust is created by someone other than the trust beneficiary. This person is usually the child’s parent, a grandparent, or an adult with special needs. Typically, a person with assets exceeding $2,000 is disqualified from receiving government benefits.
A third-party special needs trust is the best option for people with special needs. It can preserve assets while preserving eligibility for government benefits. An experienced special needs attorney can establish a third-party special needs trust.
The trust can also be funded with an existing life insurance policy. Make sure that the policy is irrevocable. If a parent passes away, a special needs trust may be an excellent option for the child.
