WEALTH TIP OF THE MONTH

Understanding Special Needs Trusts: A Practical Guide

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If you're working with families who have a loved one with a disability, special needs trusts (SNTs) are one of the most valuable planning tools you can recommend. Let me walk you through how they work and why they matter so much.

 

What's a Special Needs Trust?

At its core, an SNT is a thoughtfully designed legal arrangement that lets families provide financial support to a loved one with a disability without accidentally derailing their government benefits. We're talking about critical programs like Supplemental Security Income (SSI) and Medicaid—benefits that often have strict asset limits. The trust holds and manages assets in a way that keeps the person eligible for these essential programs.

 

The Two Flavors of SNTs

Think of SNTs as coming in two varieties, each designed for different circumstances:

Third-Party SNT (The Family Planning Trust)

This is the one you'll set up when parents, grandparents, or other family members want to leave assets for someone with a disability. Here's what makes it attractive: when the beneficiary passes away, whatever's left in the trust goes to whomever the family chooses—siblings, other relatives, or favorite charities. There's no payback requirement to the government for benefits received.

 

First-Party SNT (The Self-Settled Trust)

This comes into play when the person with a disability receives their own assets—maybe from a personal injury settlement, an inheritance they received directly, or a lump sum of back benefits. The catch? When the beneficiary dies, Medicaid gets first dibs on any remaining funds to recover what it paid out over the years. Only after that reimbursement can other beneficiaries receive anything left over.

 

Why SNTs Make Such a Difference

These trusts do so much more than just check a compliance box. They genuinely transform lives.

 

Safeguarding Essential Benefits

The primary goal is protecting access to programs that many families simply couldn't afford to replace:

• Healthcare coverage: Medicaid can cover tens of thousands (sometimes hundreds of thousands) in annual medical and residential care costs

• Monthly income support: SSI provides steady income for basic living expenses

• Housing and services: Maintaining eligibility for subsidized housing and community support programs

 

Creating a Better Life

Here's where it gets really meaningful. The trust can pay for all those things that government programs don't cover—the extras that make life truly worth living:

• Specialized therapies or cutting-edge treatments not covered by insurance

• Educational opportunities and vocational training

• Entertainment, hobbies, and social activities

• Technology, equipment, and anything else that brings joy and independence

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Professional Money Management

For individuals who can't handle complex financial decisions, the trust provides expert oversight—everything from investment management to tax planning and creditor protection.

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When Should You Recommend an SNT?

 

Estate Planning Scenario

When clients are drafting their wills or revocable trusts and plan to leave assets to someone with a disability, incorporating a Third-Party SNT is the gold standard. It's straightforward, flexible, and gives families peace of mind that their gift will truly help, not hurt.

 

Windfall Situation

If your client with a disability suddenly receives a substantial sum—from a lawsuit settlement, an unexpected inheritance, or any other source, you'll need a First-Party SNT. Yes, there's that Medicaid payback provision, but it still allows them to use the funds for years without losing their benefits. That's almost always better than the alternative.

 

High-Cost Care Needs

SNTs become absolutely essential when someone receives Medicaid funding for expensive services like group home placements or 24/7 care. These costs can easily exceed what most families could ever pay privately.

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A Real-World Example

Let me paint you a picture. Margaret is doing her estate planning, and she wants to leave $750,000 to her granddaughter Sarah, who has a disability. Sarah currently receives SSI and Medicaid, which covers her $140,000 annual residential care costs.

 

The Wrong Way: If Margaret leaves the money directly to Sarah, Sarah immediately loses her Medicaid and SSI. That $750,000 sounds like a lot, but at $140,000 per year just for basic care, it'll be gone in about five years. After that, Sarah has nothing—no inheritance left and a waiting period before she can re-qualify for benefits.

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The Right Way: Margaret establishes a Third-Party SNT in her estate plan for Sarah's benefit. Now Sarah keeps her government benefits, which continue covering her care indefinitely. The $750,000 becomes her "quality of life fund” paying for restaurant meals, concert tickets, art classes, vacations with friends, whatever brings her happiness. This money can enhance her life for decades to come.

 

That's the power of proper planning. One simple trust document makes all the difference between a few years of coverage and a lifetime of security and joy.

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The bottom line: Special needs trusts aren't just legal documents—they're lifelines that preserve dignity, independence, and quality of life for people with disabilities while giving families confidence that their loved ones will be cared for long into the future.

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Ready to ensure your loved one's financial security while preserving their essential benefits? Contact us to discuss how proper special needs trust planning, trustee selection, and strategic structuring can provide both protection and peace of mind for your family's future. 

 

barry.boscoe@brightonadvisory.com

Office: 818-342-9950

   Mobile: 818-802-0686