Thoughtful planning is essential when considering the future of a loved one with special needs. Special Needs Trusts (SNTs) offer a way to provide financial support without jeopardizing eligibility for government benefits.
First-party special needs trusts
The person with a disability originally owns the assets that fund first-party SNTs. People often establish this type of trust when the beneficiary receives a large sum of money, such as an inheritance or a legal settlement. A parent, grandparent, legal guardian, or court can create this trust. Yet, the beneficiary must be under 65 years old, and the trust must be irrevocable.
One critical aspect of first-party trusts is the payback requirement. The trustee must reimburse the government for benefits provided during the beneficiary’s lifetime upon the beneficiary’s death. After reimbursement, the trustee distributes any remaining assets according to the trust’s terms.
This type of trust provides protection against disqualification from government programs due to sudden windfalls, while also shielding assets from creditors in case of legal action.
Third-party special needs trusts
In third-party SNTs, someone other than the beneficiary provides the funding, which is different from first-party trusts. This could be a family member or any other individual wishing to provide support. There are no age restrictions for beneficiaries under this type of trust. A third-party SNT can be either revocable or irrevocable, allowing flexibility in terms and conditions based on the grantor’s preferences.
A significant advantage of third-party trusts is the absence of a government payback requirement. Upon the beneficiary’s death, the trustee can distribute the remaining funds according to the trust’s instructions.
How special needs trusts safeguard benefits
By keeping trust assets separate from the beneficiary’s direct control, SNTs help maintain eligibility for programs like Supplemental Security Income (SSI) and Medicaid. The trustee manages the trust assets, making purchases that enhance the beneficiary’s quality of life, such as medical expenses, education, and recreational activities.
Creating a Special Needs Trust can be complex. While it is possible to draft these trusts using guides and forms, consulting an estate planning attorney is advisable. An attorney can ensure the trust is properly structured to meet legal requirements and truly serve the best interests of your loved one.
