SPECIAL NEEDS TRUSTS: HOW TO PROTECT YOUR ASSETS FOR THE BENEFIT OF YOUR LOVED ONE WITH SPECIAL NEEDS
March 21, 2022
What Is a Special Needs Trust and How Might It Help Provide a Better Life for My Loved One With a Disability When I Pass Away?
One of the most common tools used by attorneys in planning for public benefits is a special needs trust (“SNT”). Governmental benefits are designed to provide basic health care, food and shelter. As such, governmental benefits provide for only a meager existence to recipients.
A SNT is designed to provide additional needs and extras, such as vacations, that normal governmental benefits do not provide. A SNT can either be self-settled or third-party settled depending on the source of the funding.
CAUTION: When establishing or administering a SNT, it is important to correctly determine the source of the funding (i.e. self-settled or third-party funds). As discussed below, these two types of trusts have different requirements. Additionally, a catch-all trust that includes both self-settled and third-party funds is prohibited. Third-party funds should never be comingled with a self-settled trust, and vice versa.
Why Is It Imperative to Plan for a SNT Right Now?
If you do nothing, and your loved one with a disability inherits your money:
She will likely be disqualified from public benefits,
She may lack the financial acuity to manage the funds, and
A court order may be required to establish a Self-Settled Special Needs Trust for the benefit of your loved one with special needs.
There must be a provision to pay back Medicaid upon the termination of the trust.
Why Is It Important to Set Up A Third-Party Settled Special Needs Trust Instead of Letting Your Loved One With Special Needs Inherit the Property Outright?
In addition to avoiding the problems listed above of leaving a gift outright to your loved one with special needs, if you set up the Special Needs Trust with your funds for the benefit of your loved one with special needs, the Trust will be treated as a Third-Party Settled Special Needs Trust.
If your loved one with a disability inherits the money and then places the money into a Self-Settled SNT, any money remaining on the death of the loved one with special needs or on the termination of benefits, the SNT must contain a payback provision. This means that the Government must be paid back dollar for dollar for the benefits provided.
However, if you instead create a Third-Party Settled SNT and fund it properly for the benefit of your loved one with special needs, on the death of your loved one with disabilities or on the termination of her benefits, the trust will not need to pay back the government even one single dollar and instead you can leave any remaining funds to your other loved ones, or charity, whatever you choose!