Special Needs Trust Fairness Act Becomes Law

young adult woman on wheelchair in the park

Carolyn is physically disabled, but has full mental capacity. Her parents and grandparents are no longer around. She would like to set up a Special Needs Trust for herself, to ensure that she is protected against the risk of impoverishment. In the past she couldn’t do so, and had to rely on a family member or guardian to do so on her behalf. On December 13, 2016, things changed for people like Carolyn, when President Obama signed the Special Needs Trust Fairness Act into law.

Tucked inside a larger bill, the Special Needs Trust Fairness Act is designed to make it easier for people with disabilities to protect assets.  Prior to the passage of this law, capable individuals with disabilities had to rely upon parents, grandparents, legal guardians, and the courts to be able to establish this type of trust on their behalf. This was due to a glitch in the law that existed since its enactment over 20 years ago. Now people with disabilities can create their own first-party special needs trusts without having to rely on others.

“This provision replaces an antiquated law that was unfair and outmoded in its treatment of people with disabilities,” said Sen. Chuck Grassley, R-Iowa, who sponsored the Special Needs Trust Fairness Act. “Those who want and need to set up a trust to help pay for their care should be able to do so, plain and simple,” Grassley said. “This measure allows individuals to act in their own interests with their own assets without having to rely on a family member or the courts.”  This new law does not mean that disabled individuals should go out and create their own special needs trusts with forms they find on the Internet. On the contrary, disabled persons must use an experienced special needs attorney to prepare the trust because the laws governing special needs trusts are among the most complex laws in existence, as they are designed to protect assets in connection with SSI and Medicaid, and Medicaid is well known to be the most complex area of law and existence.

Click here for what the United States Supreme Court and many other courts say about the complexity of Medicaid laws.

What are the different types of Special Needs Trusts?

If you or a loved one is disabled, it is wise to consider creating a special needs trust. A special needs trust is an essential tool to protect a disabled individual’s financial future. Also known as “a supplemental needs trust,” this type of trust preserves eligibility for federal and state benefits by keeping assets out of the disabled person’s name. Special Needs Trusts fall generally into two main categories:

  • Third-Party SNTs that one person creates and funds for the benefit of someone else.
  • First-Party SNTs (also called d4a trusts) that are created for the person with special needs using that person’s own money. As mentioned previously in this article, now, people with disabilities can create their own first-party special needs trusts without having to rely on others.

Both “first party” and “third party” Special Needs Trusts are created for the benefit of an individual with a disability, but have some differences. Below is a brief summary about them:

First Party Special Needs Trusts

  • A First Party Special Needs Trust is funded with assets or income that belong to an individual with a disability (the beneficiary).
  • The trust must be irrevocable and must provide that Medicaid will be reimbursed upon the beneficiary’s death or upon trust termination, whichever occurs first. Because of this, First Party Special Needs Trusts are often called “Payback Trusts.”
  • A First Party SNT is commonly funded with money from an inheritance, a personal injury lawsuit, or child support.

Third Party Special Needs Trusts

A Third Party Special Needs Trust is funded with assets belonging to persons other than the beneficiary.

  • Funding typically comes from the estates of parents or grandparents and life insurance policies naming the third party SNT as beneficiary.
  • Practically anyone other than the beneficiary can create a Third Party SNT.

Assets remaining in a properly-established Third Party SNT are not recoverable by Medicaid at the time of the beneficiary’s death – in other words, there is no payback requirement. This allows the trust creator to provide for alternate beneficiaries upon the death of the disabled beneficiary.

Read more here.

Another Kind of Special Needs Trust

Pooled third-party trusts are an alternative to setting up your own special needs trust if you can’t come up with a good choice for trustee or if you are only putting a small amount of money into the trust.

They can be advantageous because the people managing the trust and its assets are typically attuned to the special needs community and knowledgeable about the rules governing the SSI and Medicaid programs. In addition, even if you don’t have a lot of money to leave to your loved one, a third-party pooled trust provides a way to benefit from a special needs trust without having to create one yourself.

Pooled trusts are not for every family. Why?

  • Some non-profits end up doing a bad job managing pooled trusts or may even go out of business altogether.
  • Some pooled trusts distribute assets only at certain times of the month. This can be a problem for a beneficiary who may need distributions more frequently.
  • Generally, there is a one-time setup fee that can run from a few hundred dollars to several thousand dollars. Plus, there is typically an annual fee that is based on a percentage of the assets that are put into the trust that can be several thousand dollars a year.
  • Once the assets are in the pooled trust, it is difficult to move the assets to another trust.
  • Some pooled trusts will not agree to own real estate or authorize other nontraditional investments.

Before you sign on with a pooled trust, it is wise to explore your options. Read more on our website.

When it comes to special needs planning, we can guide you through this process. Please contact us to make an appointment for a no-cost consultation:

Fairfax Special Needs Attorney: 703-691-1888
Fredericksburg Special Needs Attorney: 540-479-1435
Rockville Special Needs Attorney: 301-519-8041
DC Special Needs Attorney: 202-587-2797

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