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Special Needs Trusts
What is a Special Needs Trust?
First, a short explanation of what trusts are and how they work: A trust is a form of ownership of property, whether real estate or investments, where one person – the trustee – manages such property for the benefit of someone else – the beneficiary. The trustee must follow the instructions laid out in the trust agreement as to how to spend the trust funds on the beneficiary’s behalf – whether and when to distribute the trust income and principal.
A special needs trust is typically designed to restrict payment for food and shelter, but can typically pay for the following special needs:
A trust that is created and funded by someone for the benefit of a person with special needs is often called a "third party SNT." This type of trust can be created while you are alive by using a revocable or irrevocable living trust, or can be created upon your death through your living trust or through your Last Will and Testament. If you create and fund a third-party SNT during your lifetime, you can place assets into the SNT while you are alive and/or upon your death. This type of third-party SNT can also be used to receive any inheritance that may come from a grandparent or other family member, provided the other family member properly names the SNT that you created. Because the SNT will own the assets, the beneficiary will not become ineligible for government benefits. On the contrary, the SNT allows the beneficiary to receive vital public benefits, while the funds in the SNT can be used for the special needs beneficiary to improve care and quality of life until his or her own death, at which time any assets left in trust can pass to whoever you name in the trust document.
A number of issues arise with respect to the question of how much to put into a third-party SNT. First, how much will your child with special needs require over her life? Second, should you leave the same portion of your estate to all of your children, no matter their need? Third, how will you assure that there’s enough money?
The above discussion involves estate planning by parents for money they plan to leave their child with special needs. However, a third-party special needs trust cannot hold funds belonging to the disabled individual himself. Unexpected events may trigger money being paid directly to a person with special needs. This may happen, for example, through an inheritance from a family member, life insurance proceeds, or a personal injury settlement. If a person is about to receive money or property in an amount that will cause him or her lose benefits, a First-Party SNT – often called a “(d)(4)(A)” trust, so-named after the U.S. Code section that authorizes this type of trust – is a planning option that can help set aside some or all of the money for supplemental needs and still allow the person to stay on public benefits without any period of disqualification. If a person has already received money or property in an amount that has caused him or her lose benefits, the First-Party SNT can still be used as a tool to set aside some or all of the money for supplemental needs and allow the person to re-obtain public benefits.
Choosing a trustee is one of the most difficult parts of planning for a person with special needs. The trustee of a special needs trust must be able to fulfill all of the normal functions of a trustee – accounting, investments, tax returns and distributions – and also be able to meet the needs of the special beneficiary. The latter often means having an understanding of the various public benefits programs, having sensitivity to the needs of the beneficiary, and having knowledge of special services that may be available. There are a number of possible solutions, including professional trustees such as banks, trust companies, and law firms who work with special needs trust. Often parents choose to appoint co-trustees – for example a trust company or law firm as a professional trustee along with a healthy child as a family trustee. Working together, the co-trustees can provide the necessary experience to meet the needs of the child with special needs. Unfortunately, in many cases such a combination is not available. Some professional trustees require a minimum amount of funds in the trust. In other situations, there is no appropriate family member to appoint as a co-trustee.
A pooled SNT is a special type of SNT that is created by a nonprofit organization. The nonprofit organization may act as the trustee of the pooled SNT, or it may select the trustee. Individuals have separate accounts in the pooled SNT, but all the money is pooled together and invested by the trustee. Individual beneficiaries get the services of a professional trustee and more investment options because there is more money overall. A third-party pooled trust provides a way to benefit from a special needs trust without having to create one yourself.