Considerations with a Special Needs Trust

Do you have a family member with special needs? If yes, your loved one may require assistance throughout their lives. To ensure that loved one is properly taken care of after you are gone, you can help manage resources for them by using a third-party special needs trust (SNT).

A third-party SNT (sometimes called a supplemental needs trust) is a trust created by someone other than the special needs beneficiary, funded with assets that do not belong to the beneficiary, with direction to use those assets for the benefit of that special needs beneficiary. Third-party SNTs allow the beneficiary to receive some benefit from the trust that supplement public assistance programs such as Medicaid and Supplemental Security Income (SSI), while preserving the beneficiary’s eligibility for means-tested government benefits. When the beneficiary passes away, whatever funds remain in the third-party SNT can pass to other family members.

It is crucial to choose the right trustee to manage a third-party SNT. The person selected for this role must understand their responsibilities and fulfill them in a way that does not jeopardize the beneficiary’s government benefits.

SNTs and Third-Party SNTs Explained
There are two main types of SNTs: first-party SNTs and third-party SNTs. Both are intended to ensure that a person with a disability or functional needs can receive financial support from the trust while preserving their government benefits. The difference between these two types of trusts is the source of trust funding and the government’s entitlement to any portion of the trust’s funds.

  • First-party SNTs are funded with assets that belong to the beneficiary. Typically, this type of SNT is set up by a person with special needs if they receive a windfall, such as a personal injury or medical malpractice settlement, or if they become disabled at a time when they have significant assets but need to qualify for means-based benefits.
  • Third-party SNTs are established by someone other than the beneficiary — a parent, grandparent, sibling, or other person — and funded with assets belonging to someone other than the beneficiary, to benefit their family member or friend with special needs. A third-party SNT can be created in two ways:
    • A standalone third-party SNT is created during the lifetime of the trustmaker, is effective immediately upon creation, and remains effective after the death of the trustmaker. It is eligible to receive assets from multiple sources during and after the trustmaker’s lifetime.
    • A testamentary third-party SNT is created as part of a person’s last will and testament and does not come into existence until the person who created the will passes away. At the time of death, designated estate assets are transferred to the trust and the individual with special needs becomes the beneficiary of the trust.

SNTs and Government Benefit Reimbursement
Whichever type of SNT is created, whether first-party or third-party, standalone or testamentary, the assets in the trust are legally owned by the trust, not the beneficiary. As a result, the special needs beneficiary is not disqualified from SSI or Medicaid, which have income and resource limits for enrollees.

There is an important difference, however, between first-party and third-party SNTs in terms of government benefit reimbursement:

  • In a first-party SNT, when the beneficiary dies, the state Medicaid agency is entitled to reimbursement for the benefits paid on behalf of the beneficiary during their lifetime. This reimbursement could fully exhaust the remaining trust funds. Only after Medicaid reimbursement has been satisfied can the trust balance be distributed to other beneficiaries named in the trust by the trustmaker.
  • A third-party SNT is not required to reimburse Medicaid. The assets in the third-party SNT never belonged to the beneficiary. When the beneficiary of a third-party SNT dies, all remaining assets can pass to other named beneficiaries. The government will not get any portion of the trust funds.

Responsibilities of a Third-Party SNT Trustee
After deciding to create a third-party SNT, the next, and equally important, decision is to select someone to serve as trustee.

The trustee is the person responsible for managing the SNT on behalf of the disabled beneficiary. They administer the trust and manage its assets according to the trust’s terms. More than one individual can serve as trustee. A trustee can also hire an attorney or other professional to help them meet their legal duties.

The trustee has a fiduciary duty to act in the best interests of the trust beneficiary. In general, they are required to ensure the beneficiary remains eligible for government benefits by providing supplemental financial support from the trust for specific and limited purposes. For example, the trustee may use the trust funds to pay for things like education, recreation, and vacations.

A trustee’s duties can include the following:

  • Overseeing investments of trust assets
  • Maintaining trust records
  • Handling trust distributions to the beneficiary
  • Filing the trust’s taxes
  • Communicating with the beneficiary and other involved family members

Third-party SNT trustees have a big responsibility. They must understand the rules and regulations surrounding government benefits and allowable distributions. If done improperly, using an SNT to provide cash or cash equivalents to the beneficiary, or to pay for the beneficiary’s food or shelter, could disqualify a beneficiary from public benefits.

In all trust-related matters, the trustee must act to ensure the beneficiary maintains the highest quality of life possible. Failure to uphold their fiduciary duty could not only harm the beneficiary, but also lead to legal action against the trustee. A new trustee may have to be named. If estate planning documents do not name a successor trustee, the court may need to appoint somebody to serve as trustee.

Choosing a SNT Trustee
Special needs trusts have highly technical terms and administrative requirements. The rules governing them are very complicated. A simple mistake on the part of the trustee could unintentionally hurt the beneficiary.

A layperson named as the trustee of an SNT should usually hire an attorney to provide guidance and assistance. To satisfy their fiduciary duty and make sure the disabled beneficiary receives appropriate support, they usually should hire an attorney. Attorney fees can be properly paid out of the trust.

Alternatively, an SNT can appoint a professional trustee to oversee the trust. Hiring a professional trustee may increase trust costs, but a trustee who has experience with SNTs may be better suited than a family member to carry out the trustee’s many important responsibilities.

Let Us Help
We can assist you with setting up an SNT. We also can work with SNT trustees to meet their legal duties and maximize trust benefits.

Please contact us to discuss your specific goals and needs.