A Brief Overview of the Special Needs Trust
A special needs trust, sometimes also called a supplemental needs trust, or SNT, is a kind of trust for an individual with a disability such as a physical or cognitive restriction or impairment. What distinguishes the SNT from other trusts is that it can provide for the beneficiary without jeopardizing the beneficiary’s eligibility to receive means-tested government benefits like Medicaid and Supplemental Security Income (SSI).
Preserving Means-Tested Government Benefits
While the government provides benefits to individuals with disabilities, these programs typically impose asset limits on the recipient. Using a carefully constructed SNT, the person with a disability, called the trust beneficiary, is still eligible for the government programs because the trust beneficiary does not own the trust assets; rather, the trust itself owns the assets and the trustee administers the assets for their benefit within certain guidelines.
Two Types of SNT
Generally, there are two different types of SNTs. A first-party SNT, also called a self-settled trust and a third-party SNT, also called a supplemental needs trust.
In a first party SNT, the person with the disability (the grantor) both funds the trust with assets or income and is also the trust beneficiary. The beneficiary must be classified as disabled by the Social Security Administration. Typically, a first party SNT is funded by a personal injury settlement, retirement account, or an inheritance that the beneficiary receives outright.
For these trust assets not to count for Medicaid or SSI purposes, federal law requires:
the trust must be established and funded before the beneficiary reaches age 65;
the trust must be irrevocable;
the trust provisions must include reimbursement to Medicaid when the trust terminates; and
the trust must be administered solely for the beneficiary’s benefit.
As the name implies, a third-party SNT is funded with assets from someone other than the beneficiary. The funding may come from gifts, inheritance, or life insurance proceeds, but the beneficiary’s own funds may not be used to fund the trust. This type of SNT is not required to pay back Medicaid when the trust terminates. Instead, the trustmaker (grantor) decides how the trust estate is to be distributed when the trust terminates. In some states, the beneficiary of a third-party special needs trust must also be a person with a disability.
A Properly Drafted SNT Is Key
Special needs trusts serve an important function but must meet extremely specific legal requirements. In addition, an SNT is specific to the needs of the beneficiary. The required language can vary significantly from one trust to another. State requirements for an SNT vary as well. In addition, the tax consequences of an improperly formed SNT can be severe. Working with a legal professional with experience, and understanding of special needs, and the planning involved is critical.
Work with an experienced Virginia estate planning attorney.
If you need to set up a special needs trust, we can help. Contact Wilson Law PLC today at 866-603-5976 to set up a meeting or fill out our contact form and we’ll call you to schedule your meeting.