A Special Needs Trust (SNT) is a legal arrangement designed to provide financial support for individuals with disabilities while preserving their eligibility for government benefits such as Supplemental Security Income (SSI) and Medicaid. These trusts ensure that funds are available to enhance the beneficiary's quality of life without disqualifying them from essential public assistance programs.
If you're considering setting up a Special Needs Trust for a loved one, it's crucial to work with an experienced attorney who understands the legal and financial complexities involved. Contact us at Heritage Law Office by calling 414-253-8500 or using our online form for guidance on creating a customized plan.
How Does a Special Needs Trust Work?
A Special Needs Trust is managed by a trustee, who controls the funds and makes disbursements on behalf of the beneficiary. Because the beneficiary does not have direct access to the trust funds, government agencies do not count the assets in the trust when determining eligibility for benefits.
The trust can be used to pay for:
- Medical and dental care not covered by Medicaid
- Education and training programs
- Personal care attendants
- Recreational activities
- Transportation, including vehicle modifications
- Specialized equipment
- Travel and entertainment
By covering these expenses, an SNT enhances the beneficiary's standard of living without jeopardizing government benefits.
Types of Special Needs Trusts
There are three primary types of Special Needs Trusts, each serving different purposes:
1. First-Party Special Needs Trust
Also known as a self-settled trust, a First-Party SNT is funded with the disabled individual's own assets, such as an inheritance, a legal settlement, or personal savings. The key feature of this trust is that after the beneficiary's death, any remaining funds must be used to reimburse the state for Medicaid expenses.
2. Third-Party Special Needs Trust
A Third-Party SNT is funded by someone other than the beneficiary, typically parents or family members. This type of trust does not have a Medicaid payback requirement, allowing any remaining funds to be passed on to other heirs after the beneficiary's passing.
3. Pooled Special Needs Trust
Managed by a nonprofit organization, a Pooled Trust combines assets from multiple beneficiaries but keeps individual accounts separate. These trusts are useful for families who may not have a designated trustee and can be a cost-effective alternative to setting up an individual trust.
Special Needs Trust Comparison Table
The following table outlines the key differences between the three main types of Special Needs Trusts (SNTs) to help you determine which one best fits your situation.
| Type of Special Needs Trust | Funding Source | Medicaid Payback Requirement | Best For | Who Can Establish It? |
|---|---|---|---|---|
|
First-Party SNT |
Beneficiary's own assets (inheritance, lawsuit settlement, personal savings) |
Yes - Any remaining funds must reimburse Medicaid |
Individuals who receive a settlement or inheritance and need to preserve benefits |
The individual with a disability, their guardian, a parent, or the court |
|
Third-Party SNT |
Funds from parents, relatives, or others |
No - Remaining assets can go to other heirs |
Families planning for a disabled loved one's future financial security |
Parents, grandparents, or anyone other than the beneficiary |
|
Pooled SNT |
Assets from multiple beneficiaries, managed by a nonprofit |
Yes - Some portion of funds may be retained by the nonprofit |
Individuals who do not have a private trustee or want a cost-effective trust option |
The individual, their family, or a guardian |
Benefits of a Special Needs Trust
Setting up a Special Needs Trust (SNT) offers several advantages for both the beneficiary and their family. Some of the key benefits include:
1. Protects Eligibility for Government Benefits
Government programs like Supplemental Security Income (SSI) and Medicaid have strict asset and income limits. If a person with disabilities directly receives an inheritance, lawsuit settlement, or financial gift, they may exceed these limits and lose crucial benefits. An SNT shields these assets, ensuring continued eligibility for assistance.
2. Provides Long-Term Financial Security
An SNT ensures that funds are managed responsibly over the beneficiary's lifetime. Instead of providing a lump sum, which could be quickly depleted or mismanaged, the trustee controls disbursements to cover essential expenses while preserving assets for the future.
3. Enhances Quality of Life
While government benefits cover basic needs like food, housing, and medical care, an SNT can pay for supplemental expenses that improve the beneficiary's quality of life, including:
- Education and training (college courses, skill development, tutoring)
- Hobbies and recreation (art supplies, sports, musical instruments)
- Assistive technology (wheelchairs, hearing aids, communication devices)
- Home modifications (ramps, widened doorways, accessible bathrooms)
- Companion services (caregivers, transportation, social outings)
4. Prevents Financial Exploitation
Because the trustee has full control over the assets in an SNT, the funds are protected from financial abuse, mismanagement, or exploitation. This is especially important for individuals who may be vulnerable to undue influence or poor financial decisions.
5. Customizable to Specific Needs
Each Special Needs Trust can be tailored to meet the unique circumstances of the beneficiary. Whether it's a First-Party, Third-Party, or Pooled Trust, the structure can be adjusted based on funding sources, family circumstances, and long-term goals.
Who Should Consider Setting Up a Special Needs Trust?
A Special Needs Trust is ideal for individuals who:
- Have a disability and rely on government benefits such as SSI and Medicaid
- Expect to receive an inheritance, settlement, or other financial assets
- Need long-term financial support for housing, medical care, and daily expenses
- Have family members who want to contribute to their care without affecting benefits
- Require protection from financial mismanagement or exploitation
If you have a loved one with a disability, creating an SNT is a proactive way to ensure their financial well-being without risking their eligibility for essential benefits.
How to Set Up a Special Needs Trust
Creating a Special Needs Trust involves several key steps. Working with an experienced estate planning attorney is essential to ensure the trust is legally compliant and structured correctly.
Step 1: Determine the Type of Trust
Decide whether a First-Party, Third-Party, or Pooled Trust is the best fit for your situation. Each type has unique funding sources, rules, and benefits.
Step 2: Appoint a Trustee
Choose a responsible and trustworthy individual or institution to manage the trust. This could be:
- A family member
- A professional trustee (such as a bank or trust company)
- A nonprofit organization (for Pooled Trusts)
Step 3: Fund the Trust
Identify the assets that will be placed into the trust. Common funding sources include:
- Inheritances
- Life insurance proceeds
- Settlements from personal injury lawsuits
- Gifts from family members
Step 4: Draft the Trust Document
An attorney will draft a legally binding trust agreement that outlines:
- The purpose of the trust
- How the funds will be used
- The role and responsibilities of the trustee
- Any restrictions on fund disbursement
Step 5: Administer the Trust
Once established, the trustee manages the trust, ensuring that distributions align with government benefit rules and the beneficiary's needs. Regular reviews help adapt to changing circumstances.
Common Mistakes to Avoid When Setting Up a Special Needs Trust
1. Naming the Beneficiary as Trustee
The beneficiary should never serve as the trustee. If they have control over the trust assets, the government may consider those assets available resources, which could disqualify them from benefits.
2. Failing to Fund the Trust Properly
A trust without sufficient funding cannot serve its intended purpose. It's important to ensure that inheritances, life insurance proceeds, or other financial gifts are directed into the trust rather than given directly to the beneficiary.
3. Not Consulting an Experienced Attorney
Improperly drafted trusts can lead to government benefit disqualification or unnecessary tax liabilities. An experienced estate planning attorney ensures compliance with state and federal laws.
4. Overlooking Successor Trustees
If the primary trustee is unable to fulfill their duties, a successor trustee should be designated in the trust document to ensure continuity in managing the trust.
5. Using Trust Funds for Non-Approved Expenses
The trustee must follow strict guidelines when making disbursements. Using trust funds for food, shelter, or other basic needs may reduce or eliminate SSI benefits.
Contact an Attorney for Special Needs Trusts
Setting up a Special Needs Trust requires careful planning to ensure your loved one is financially secure while maintaining eligibility for government benefits. At Heritage Law Office, we help families navigate the complexities of estate planning to create customized solutions that protect individuals with disabilities.
Contact us today or call 414-253-8500 to schedule a consultation and discuss how we can assist with your Special Needs Trust needs.
Frequently Asked Questions (FAQs)
1. What is the purpose of a Special Needs Trust?
A Special Needs Trust (SNT) is designed to provide financial support to individuals with disabilities while preserving their eligibility for government benefits such as Supplemental Security Income (SSI) and Medicaid. The trust ensures that funds are available for expenses that improve the beneficiary's quality of life without affecting public assistance programs.
2. Can a Special Needs Trust pay for housing or food?
Generally, an SNT should not be used to pay for housing or food, as these expenses could reduce the beneficiary's SSI benefits. However, in some cases, the trustee may decide to cover these costs if the benefits outweigh the potential reduction in government assistance. It's best to consult with an attorney to structure the trust properly.
3. Who can serve as the trustee of a Special Needs Trust?
A trustee can be:
- A family member who is responsible and knowledgeable about government benefit rules
- A professional trustee (such as a trust company or bank)
- A nonprofit organization (for a Pooled Special Needs Trust)Choosing the right trustee is crucial, as they are responsible for managing trust assets and making proper distributions.
4. What happens to the money in a Special Needs Trust when the beneficiary passes away?
The distribution of remaining funds depends on the type of Special Needs Trust:
- First-Party SNT: Any remaining funds must be used to repay the state for Medicaid expenses.
- Third-Party SNT: The assets can be distributed to other beneficiaries as designated in the trust.
- Pooled SNT: The nonprofit managing the trust may retain a portion of the funds, with the rest distributed per the agreement.
5. How do I set up a Special Needs Trust?
To establish an SNT, follow these steps:
- Consult an experienced attorney to determine the best type of trust.
- Select a trustee to manage the trust assets.
- Fund the trust with assets such as inheritances, life insurance, or gifts.
- Draft a trust agreement outlining how the funds should be used.
- Administer the trust according to legal requirements to ensure compliance.
Need help setting up a Special Needs Trust? Contact us today or call 414-253-8500 to schedule a consultation.