Special Needs Trusts & Disability Planning

What is a Special Needs Trust?

A special needs trust is an estate planning tool for parents who are concerned about the financial well-being of their disabled child after their deaths Families have several estate planning options in providing for a special needs loved one.

  • The special-needs person may be disinherited. This is an option if the assets available for the special needs person are small.
  • Give the special needs person the assets outright. Caution should be exhibited with this option as it could result in government interference or the special needs person spending it unwisely.
  • Another option is to give the funds to a third party for the care and well-being of the special needs person. Be careful! The third party you chose has no legal obligation to spend it on the special needs person. It is subject to the owner's creditors and can have a negative effect on his or her income or estate plan. Also, when the owner dies, his or her heirs may not be trusted to care for the special needs person heir.
  • This leaves us with the last and usually best option, the Special Needs Trust (SNT).

What is the Purpose of a Special Needs Trust?

The purpose of an SNT is to enhance the quality of life of individuals with disabilities without jeopardizing their continued access to government benefits. Special Needs Trusts are used to allow one person to set aside funds for the care and benefit of a special needs person. The key to an SNT is that they are drafted to be totally discretionary so that the special needs person cannot demand distributions. Since the assets are not legally available to the beneficiary on demand, they are not considered assets when the special needs person applies for government benefits.

Special Needs Trusts are also used to manage and shelter funds of the special needs person gained through inheritance, life insurance, or personal injury award. As long as the special needs person is not the trustee, there is no interference with the special needs person's ability to qualify for SSI or other government benefits. SNT's must conform to government requirements to assure that the special needs person continues to be eligible for SSI or Medicaid.

Types of Special Needs Trusts

There are three main types of special needs trusts:

  • A Third Party SNT is set up and funded by a donor/grantor who may be a parent or other person with no legal duty to support the disabled individual. Once a trust is established, anyone can gift or leave money for the benefit of the person to the trust.
  • An OBRA-93 Payback SNT is a trust established by a parent, grandparent, legal guardian or court, but which is funded with the assets of a beneficiary under age 65. When the beneficiary dies, the State has a right to be “paid back” out of the remainderman of the trust for Medicaid expenditures given to the beneficiary.

Pooled Trusts are trusts that, by law, are established and maintained by a not-for-profit organization. These trusts allow families to pool their resources with other families to maximize the investment and streamline management of the trust. Beneficiaries of these trusts usually receive earnings based on their share of the principal. A “sponsor” (the person who creates the trust) signs a sponsor agreement with the not-for-profit establishing an individual trust account.

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