People who have loved ones with special needs have heard horror stories about a well-meaning grandparent who left a modest inheritance to a disabled grandchild. The grandchild promptly loses her government benefits and has to struggle to regain them again once the money runs out. The disabled person didn’t really benefit – she ended up in the same near-poverty situation she was in before the gift.
Or, what about the loving single father who intentionally disinherits his disabled son to preserve his benefits – leaving everything to his daughter who promises to care for her brother. Two years after Dad dies, daughter has spent most of “her” inheritance. In many cases, a special needs trust could have prevent these types of scenarios.
What is a special needs trust?
A special needs or supplemental needs trust (SNT) is a legal document that allows a trusted individual or institution to distribute the trust’s funds in a way that improves and enhances the life of a special needs individual while preserving eligibility for means-tested government programs, such as SSI and Medicaid.
Why would I consider creating an SNT?
A disabled person might receive money from an inheritance or a personal injury award, and may need help managing that money. Or he could be disqualified from receiving certain means-tested government benefits because of the windfall. Or a family member may want to help a disabled person now, but doesn’t want to run afoul of government rules. A properly drafted SNT can help in these situations.
I’ve heard people talk about self-settled SNTs, first-party SNTs, and third-party SNTs. What are those?
A self-settled SNT and a first-party SNT are different terms for the same thing. I prefer the term “first-party SNT.” A first-party SNT is funded with the disabled person’s own money and can be created by the disabled person himself or by somebody else on behalf of the disabled person. A first-party SNT must be created before the disabled beneficiary turns age 65 and must be irrevocable (cannot be changed). Also, any assets remaining in a first-party SNT at death must be used to reimburse Medicaid.
A third-party SNT is funded with other people’s money. The money might belong to a parent, grandparent, friends, or even a stranger. A third-party SNT can be set up even if the disabled person is over age 65, and can be revocable or irrevocable. When the disabled person dies, there is no Medicaid payback requirement – the money can go to any beneficiaries the trust creator named in the trust document.
Okay. So what is a pooled trust?
Many people prefer to have a lawyer create a SNT specifically for their own family situation. But lawyers aren’t inexpensive, and sometimes the amount of the funds potentially being put into the trust may not seem to justify the expense of a creating a customized SNT. Plus, then the trustee has to decide how to invest the money, how and when to distribute it, etc.
So some non-profit institutions came up with an easier and less expensive alternative to customized SNTs – a pooled SNT. Every person in the pool uses the exact same master SNT, so no custom trust needs to be created. This allows the institution to administer all the trusts efficiently. The institution then pools all the money for investment purposes (which keeps those costs low) but keeps separate accounting statements for each individual disabled beneficiary – kind of like how your employer handles your 401(k)!
Pooled SNTs are first-party trusts, but they can be created even if the beneficiary is over age 65. When the disabled beneficiary dies, the remaining funds will either remain in the pool to help other disabled beneficiaries or will be used to pay back Medicaid.
Who should be the trustee of a special needs trust?
In many cases, people creating SNTs name themselves or other family members as the trustees. Sometimes this is fine. Other times … not so much. The laws regarding means means-tested government programs are complex and ever-changing. Generally, it may be better to name a professional trustee – someone who has experience administering SNTs. Alternatively, naming a family member and a professional trustee as co-trustees may provide the best of both worlds: The professional trustee can handle the administrative details while the family member provides the personal care and compassion.
So if a grandparent leaves money directly to her disabled grandchild in her Will, what happens?
If the Will named the disabled grandchild individually and did not name that disabled person’s SNT, then the only way to protect the disabled person would be to set up a first-party SNT – which would be subject to the Medicaid payback requirement. It has to be a first-party SNT rather than a third-party SNT because the grandparent left it to the child directly. If the grandparent named the actual SNT instead, the money could have been deposited directly to a third-party SNT – which would have no Medicaid pay back requirement.
So, how do I create a special needs trust for a disabled loved one?
Just sit down with an estate planning or elder law attorney. Make sure to bring all necessary documents such as any existing state planning documents, guardianship documents, and proof of where the disabled person’s income is coming from. Together, you’ll craft a plan that’s just right for you.
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