A special needs trust, also called a supplemental needs trust (SNT), is essentially a legal arrangement allowing a person with a disability to remain eligible for governmental benefits such as Medicaid and Supplemental Security Income (SSI) while continuing to have access to other assets or supplemental funds.
Because Medicaid and SSI are means-tested benefits and have strict limitations on an individual’s income and assets, SNTs hold the individual’s personal assets in a way that doesn’t run up against those limitations, thus preserving the individual’s eligibility. The goal of the SNT is to supplement the governmental benefits rather than replace them, and funds are intended to be used for items and services that improve the beneficiary’s quality of life such as:
- Therapeutic services
- Medical expenses not covered by insurance
- Education
- Recreation
- Transportation
Three types of SNTs
There are three basic types of SNTs: third-party, first-party and pooled. While third-party is the most common, there are unique circumstances that make the other options more sensible.
Third-party SNTs are the most like traditional trusts, in that they are funded by a grantor who is not the beneficiary. They can be revocable or irrevocable, and can be established as stand-alone or testamentary trusts. The stand-alone trust grants the beneficiary access to assets during the grantor’s lifetime. Alternatively, a testamentary trust is contained within a will, and cannot be funded until the grantor’s death.
Third-party SNTs are also the most flexible option when it comes to distributing any remaining assets after the beneficiary’s death, as the remaining assets are not required to be reimbursed to the state(s) in which Medicaid benefits were received. Thus, it’s a good option for grantors who want to provide for a beneficiary with disabilities while preserving public benefits and remaining in control of where remaining SNT assets are directed after the beneficiary’s death.
First-party SNTs are funded by the beneficiary, and are most often employed when a disabled person inherits money or property, or receives a legal settlement. It’s also a good option for individuals without a prior disability who own assets outright but become disabled later and still want to qualify for public benefits that are subject to income or asset limitations.
According to the Special Needs Trust Fairness Act signed into law in 2016, a person who is mentally capable (and also satisfies the government’s definition of “disabled”) will be able to establish their own first-party SNT. Before this law, first-party SNTs could only be established by the beneficiary’s parent, grandparent or legal guardian.
Property in a first-party SNT can only be used for the “sole benefit” of the beneficiary, who must be under 65 when the SNT is created and funded. Unlike a third-party SNT, the first-party SNT requires all remaining funds upon the beneficiary’s death be repaid to the applicable state Medicaid program(s). Any funds remaining after the Medicaid payback can be distributed to remaining beneficiaries.
Pooled SNTs are created and managed by nonprofit associations for the benefit of multiple beneficiaries, and can be used to establish both first-party and third-party SNTs. Pooled SNTs are often a more cost-effective way to administer benefits as well as optimize investment potential. Individual beneficiaries have their own sub-accounts and receive a proportionate benefit based on the entire fund’s earnings.
Depending on state laws, any remaining funds in a first-party pooled SNT may be retained by the trust after the beneficiary’s death. In addition, federal law specifies that those funds must be repaid to Medicaid if the nonprofit is not retaining those funds in the pooled SNT. For third-party pooled SNTs, there is no Medicaid reimbursement requirement, though some portion of the leftover funds may revert to the nonprofit.
Pooled SNTs are often the best choice when a family feels management of the SNT may be too complicated to responsibly manage, and the pooled trust option provides access to professional trustees. Trustee stability is another reason families opt for pooled SNTs. Families won’t have to worry about replacing a trustee that becomes incapacitated or no longer able to administer the trust.
Seek professional advice
When deciding on the right SNT for your needs, it’s always best to consult with a legal professional who can help you explore all of the available options and find the right fit for your situation. An experienced estate planning attorney can help you navigate the state and federal laws around SNTs, and find the right structure to best fit your situation.