Special Needs Trusts

Special Needs Trusts refers to an Estate Planning technique used to shelter assets for a Special Needs Person in a way that does not interrupt the person’s needs-based government benefits.

What Is a Special Needs Trust?

A Special Needs Trust is an Irrevocable Trust designed to hold assets for a person receiving needs-based government benefits. The person who benefits from the trust is the “beneficiary.” Typically, the beneficiary is an individual with physical or mental disabilities who qualifies for needs-based benefits, such as Medicaid. Giving this person money or making them an heir would disqualify them. Special Needs Trusts were created to hold assets for these people without excluding them from the benefits. A Special Needs Trust allows you to look out for your loved one by providing them with the little extras that will improve their life.

First Party Special Needs Trusts

A First Party Special Needs Trust is an Irrevocable Trust created to hold the special needs person’s assets. The Trustee uses these assets for the Special Needs Person’s care without disqualifying him or her from needs-based government benefits, such as Medicaid.

First Party Special Needs Trusts are often used when a Special Needs Person receives a legal settlement, inherits assets, or receives a divorce settlement. The goal is to allow the SNT person to benefit from their needs-based government benefits and use these other funds to supplement those benefits. Because the assets belong to the SNT person, if unused they must be applied to reimburse Medicaid.

Example: George, a Philadelphia resident, becomes a Special Needs Person as a result of a car accident. He begins collecting Medicaid. Years later, his lawyer obtains a $100,000 settlement. George places the money in a First Party Special Needs Trust. George continues to collect Medicaid. At his death, the SNT still holds $60,000. George used $150,000 of Medicaid benefits. The successor trustee must apply the $60,000 towards the $150,000 “debt.”

Third Party SNT: Trusts Set Up by the Family

Unlike First Party Special Needs Trusts, Third Party trusts are Irrevocable Trusts funded using other people’s money. If properly drafted, the Trustee can use these funds to provide for the Special Needs Person without disqualifying him or her from needs-based government benefits such as Medicaid. Because the funds never belonged to the Special Needs Person, at death, any remaining money does not have to be applied to reimburse Medicaid.

Typically, Third Party SNT are created as part of the parents’ estate plan.

Example: Grandpa is a Bucks County, Pennsylvania resident, and directs his Estate Planning Lawyer to draft a Will including a Third Party Special Needs Trust for Grandson. At Grandparent’s death, the executor funds the trust, giving the Trustee the ability to provide for Grandson. Grandson, a resident of Camden County, New Jersey, continues to receive Medicaid benefits from New Jersey. At Grandson’s death, the SNT still holds $100,000. This money does not have to pay back New Jersey for Medicaid used. Instead, it passes outright to Granddaughter, per Grandparent’s Will terms.

Pooled Special Needs Trusts

At times a Special Needs Person owns assets, but forming a First Party Special Needs Trust is inconvenient or impractical. In these cases, the funds can be contributed to a Pooled Special Needs Trust. As the name suggest, the funds are “pooled” with those of other Special Needs people’s resources creating economies of scale. The professional Trustee manages the funds for the Special Needs person but, at death, the funds must be applied to reimburse Medicare.

Advantages of a Special Needs Trust

• Special Needs Trusts allow the Beneficiary to benefit from Trust assets without being disqualified from needs-based benefits.
• The Trust’s Trustee looks out for your loved one. Because many people with physical and mental disabilities are not able to manage money, they need help. A Special Needs Trust allow you to pick someone to help. This helper can be a family member or a professional Trustee. This person then manages the asset for the Beneficiary. Think of the Trust providing your loved one a protective wall. This wall provides shelter from waste, abuse, and theft. While protecting the assets, the Trustee has the discretion to use the trust’s funds to make your loved one’s life better.
• A Special Needs Trust protects assets from theft, abuse, and waste.
• An additional layer of protection is possible by naming a Trust Protector. This Trust Protector is typically a person who will look out for the beneficiary but does not wish to serve as Trustee. The Trust Protector can monitor the Trustee with the right to remove and replace the Trustee at any time.

Julius A. Andrews is the founding member of Sir Lewis & Associate Law Firm, a six attorney boutique estate planning law firm. We serve clients in Pennsylvania, New Jersey, New York, Minnesota and Florida. Julius A. Andrews received his Masters in Taxation LL.M. from NYU Law School and his J.D. from the University of Minnesota Law School. He served his country in the Navy JAGC during Desert Storm. Easy to talk to, feel free to call Julius for an appointment. We will make the process as easy as possible!