Use a Special Needs Trust to Plan Ahead

There’s a special kind of trust for people with special needs. If you have a child with special needs, a special needs trust, or SNT, may be an important part of your comprehensive estate plan. An SNT is designed to meet the specific needs of a person with a physical or mental disability. Unlike other trusts, the SNT provides for the beneficiary without affecting the beneficiary’s eligibility for means-tested government assistance like Medicaid and Supplemental Security Income (SSI).

Protecting Qualification for Government Benefits

While the government provides benefits to people with disabilities, qualifying for some benefits is needs-based and subject to asset or income limits. The SNT provides for the person with the disability without jeopardizing eligibility for the government benefits. This is because as the trust beneficiary, the person with the disability doesn’t own the trust assets so they don’t count toward any means-based test. Instead, the trust owns the assets, and the trustee manages the assets on behalf of the trust beneficiary.

First Party and Third Party SNTs

Generally speaking, there are two different types of SNTs. The first party SNT and the third party SNT. These designations refer to who funds the trust. Here’s why that’s important.

First Party SNT or Self-Settled Trust

In the first party SNT (also referred to as a self-settled trust), the person with the disability funds the trust and is the trust beneficiary. This is why a first party SNT is also referred to as a self-settled SNT. These funds may be assets or income and typically come from a personal injury settlement, a retirement account, or an inheritance.

Federal law provides that these trust assets will not count for Medicaid or SSI purposes if these requirements are met:
• the trust must be in effect before the beneficiary turns 65;
• the trust must be irrevocable;
• the trust provisions must include reimbursement to Medicaid upon trust termination; and
• the trust must be administered solely for the beneficiary’s benefit.

Third Party SNT or Supplemental Needs Trust

Unlike the first party SNT, the beneficiary’s funds may not be used to fund a third-party trust. A third party SNT (also referred to as a supplemental needs trust) is usually funded from gifts, an inheritance, or life insurance proceeds. Also, unlike a first party SNT, a third party SNT does not have to reimburse Medicaid upon the trust’s termination. Instead, the trust maker determines how the trust assets will be distributed upon termination.

Proper Drafting Is Key

An SNT is an important tool for families that need to plan for a child with special needs. But proper drafting is key. The SNT is specific to the unique needs and situation of the beneficiary. When it comes to SNTs, there is no one size fits all approach. In addition to the needs of each beneficiary being unique, state laws impose different requirements. Finally, the federal requirements are exacting. An improperly drafted SNT can result in significant tax consequences. Working with an experienced estate planning attorney is critical when it comes to an SNT.

Work with an Experienced Florida Estate Planning Attorney
If you need to set up a special needs trust, we can help. Call our office at 561-395-6800 or fill out our contact form to schedule a meeting and we will be in touch to get that scheduled.