Special Needs Trusts

Planning for the Beneficiary with Special Needs

Since many individuals with special needs are unable to obtain needed health coverage other than through Medical Assistance, it has become common place to try and avoid the disqualification for critical public benefits when planning the estate.

The Social Security Act was amended in 1993 to permit the creation of a Special Needs Trust for individuals with disabilities.  The Special Needs Trust is designed to provide for the needs related to the individual’s disabilities, while at the same time continuing to obtain needed public benefits, such as Supplement Security Income or Medical Assistance.  These trusts may be funded with the individual’s own resources, such as an inheritance, or from any other source.  In addition, third parties may fund these trusts.  Third parties may consist of a parent, grandparent, or other relative or friend through the use of gifting or the transfer of other assets.

There are three types of Special Needs Trusts:

  1. Self-Funded Special Needs Trust
    The Omnibus Budget Reconciliation Act of 1993 (1993 Act) authorized the creation of these trusts allowing disabled persons to continue to receive Medical Assistance benefits.  These trusts are generally formed with the disabled individual’s own money while still allowing the individual to remain eligible for Medical Assistance and Supplement Security Income.
  2. Third Party Funded Special Needs Trust
    A third party could create a Special Needs Trust for an individual with disabilities using the money of another person, through either a Will or Trust created during the lifetime of the settlor.

    The difference between the Self-Funded Special Needs Trust and the Third Party Funded Special Needs Trust takes place upon the death of the disabled beneficiary.  Any moneys remaining of a Third Party Funded Special Needs Trust can, in many states, be left directly to a designated contingent beneficiary.  This may be done without the necessity of a Pay Back provision benefiting the state agency which administers the Medical Assistance program.

    Unfortunately, the Pay Back provision is a requirement under the Self-Funded Trust due to the fact that the disabled person’s own moneys have been used to fund the trust.  Congress had viewed such a Pay Back provision as a necessary trade off when enacting the Self-Funded Trust under the 1993 Act.

    The Pay Back only occurs, however, if moneys remain in the Self-Funded Trust at the death of the beneficiary, or, for that matter, any termination of the Self-Funded Trust.

  3. The Pooled Trust
    The Pooled Trust requires the trustee to be a nonprofit organization.  The nonprofit organization will manage the funds of many individuals who are typically other disabled persons, and will invest these funds collectively.  Even those these funds are collectively invested, the trustee will maintain separate accounts for each individual beneficiary. Upon the death of the beneficiary, the moneys in the account can then be used to either repay the state agency who administers the Medical Assistance program, or the funds may remain in the trust to be used for the benefit of other persons with disabilities.  The one major drawback of this type of trust is that the remaining moneys cannot pass to other non-disabled beneficiaries; specific contingent beneficiaries cannot be named under a Pooled Trust.

    Pooled Trusts are usually utilized where the corpus of the trust is modest in size and a corporate fiduciary cannot be obtained.  The second reason for utilizing a Pooled Trust, especially when the corpus is larger, is to allow the non-utilized moneys to become available for other individuals with disabilities.

The laws of Special Needs Trusts vary from state to state, so it is critical to work with an attorney in the state where you wish to develop a Special Needs Trust.  In addition, it is important to consider and carefully evaluate the appropriate type of trust in order to maximize the benefits for the disabled individual, and to best provide for the interests and goals of the relative parties.