special needs planning

If you have a loved one with a disability, you may have been told the importance of having a special needs trust. But, why? 

A special needs trust, if drafted correctly, can allow your disabled loved one to receive settlements, inheritances, gifts, or other funds without disqualifying them from government benefits, which often require certain asset and income limitations. This means that you can provide supplemental funds for things such as vacations, entertainment, education and medical treatments for which public funds are unavailable, without jeopardizing your loved one’s benefits. 

However, one size does not fit all. 

First-Party Special Needs Trust (also known as d4a Trust)

A first-party special needs trust is funded with the assets of the disabled individual. However, to qualify for this type of trust, the following requirements must be met:

Disability – The individual must be disabled under the Social Security Administration standard. 

Age – The trust must be created and funded before the age of 65. Any funds remaining in the trust after 65 can be used. Funds should not be added to the trust after the age of 65.

Sole-Benefit – The trust must be for the sole-benefit of the disabled individual. Medicaid transfer penalties may apply if funds are used to benefit other family members. 

Pay-back This type of trust requires a pay-back provision, which provides that the State be paid back for any of the services it paid out during the beneficiaries’ life. Thus, if your disabled loved one passes away and there are funds remaining in the trust, the State must be reimbursed for their services before any other individual. 

State-involvement – This type of trust requires notification to the state upon the establishment of the trust, as well as notification of expenditures of any withdrawal of an amount in excess of $5,000, or any amount which would substantially deplete the principal of the trust. The trustee of the trust is also required to provide annual accountings to the State. 

When is a First-Party Special Needs Trust useful? 

Settlements – If your disabled loved one, is entitled to proceeds from a settlement or court award it may be necessary to fund a first-party SNT to maintain benefits. 

Unexpected Inheritances – If your disabled love one receives an unplanned inheritance, a first-party SNT may be needed in order to avoid disqualification of benefits.  

Assets Over Resource Limit – If your disabled loved one is over the resource limit for Medicaid and needs Medicaid services immediately a first-party SNT may be a good option. 

Third-Party Special Needs Trust (also known as Supplemental Needs Trusts)

A third-party special needs trust or a supplemental needs trust is funded with the assets of an individual other than the disabled individual. This type of trust can be created within a Last Will and Testament (a testamentary supplemental need trust) or it can be created as a standalone document.

Unlike a first-party special needs trust, a third-party trust is not required to be funded prior to age sixty-five (65) and it does not require any payback to the State. In addition, a third-party trust allows the individual leaving the assets to control where the remaining trust assets go after the disabled individual passes away. 

So, when is a Third-Party Special Needs Trust useful?

When you have a child, who is disabled – if you have a child who is disabled and currently receives or plans to receive government benefits, creating a third-party special needs trust will allow you to direct assets to your disabled child without jeopardizing government benefits. You can direct distributions from your Estate, your life insurance, or retirement accounts to the third-party special needs trust. Retirement accounts are not typically recommended unless there aren’t other assets available to fund the trust.

When you have a relative who is disabled – if you have a grandchild, niece/nephew, sister/brother, or any other relative who is disabled and is a beneficiary or even a contingent beneficiary under your Last Will and Testament, life insurance, or any other accounts, it is important that you coordinate with your family members to ensure no money is directed to the individual outright.  You can include a testamentary supplemental needs trust in your will, or you can direct your loved one’s distribution to an already existing third-party special needs trust. 

If you fall into either of the above two categories, please remember that it is extremely important to engage in proper planning. Please feel free to contact us if you have any questions or would like to schedule a free consultation.