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Planning for a loved one with special needs is about enhancing that person’s quality of life to the maximum extent possible and protecting them only as much as necessary to not limit or restrict their potential for government benefits. If it is anticipated that there will not be a need in the future for government programs that are means-based (e.g., SSI and Medicaid) then, as a general matter, there is no need for a special needs trust. Objectives of planning include but are not limited to:

  1. Provide Financial Security
  2. Leverage Means Tested Public Benefits (e.g., Supplemental Security Income and Medicaid)
  3. Select Proper Team to Provide Lifetime Management
  4. Plan for Appropriate Housing
  5. Provide Ongoing System for Advocacy
  6. Plan for Caregiving Needs
  7. Coordinate Entire Extended Family’s Planning
  8. Protect Beneficiary from Predators
  9. Preserve Assets for other Heirs

Special needs trusts are used to supplement the beneficiary’s lifestyle rather than to supplant public benefits. Trusts used to help those with special needs include a third party trust (a/k/a “supplemental trust”) and a first-party trust (a/k/a “special needs trust”). A first-party trust is funded with the assets of the disabled person (attorneys will refer to these trusts as “(d)(4)(A)” trusts because that is the subsection of the U.S. Code that governs these trusts). A third-party trust is funded with the assets of a third person such as a parent or grandparent.

A first-party trust (SNT) can be established by the disabled person if they capacity, if not by a parent, grandparent, guardian of the disabled person or by a court. A SNT is usually established when the disabled person receives money from a lawsuit or an inheritance. Generally, a SNT requires the following:

  1. Be established before the disabled beneficiary reaches age 65 (and cannot be funded after age 65);
  2. Only permits the disabled person to be a beneficiary;
  3. It must be irrevocable;
  4. It must be an inter vivos trust (created during the disabled person’s life) and not created under a Will (i.e., a testamentary trust); and
  5. On the death of the beneficiary assets remaining in the trust must be used to pay back Medicaid benefits to the extent of the Medicaid benefits received.

Conversely, a third-party trust is usually established by the parent(s) of the disabled person. A major difference between a third-party trust and a SNT is the assets remaining in the trust upon the disabled person’s death need not be used to pay back Medicaid. Additionally, a third-party trust permits a beneficiary(s) besides the disabled person.

Another type of trust that may be funded with the disabled person’s assets is a “pooled trust” (commonly referred to as a “(d)(4)(C)” trust by attorneys). These trusts pool the resources of many beneficiaries, and those resources are managed by a non-profit association. Unlike a SNT, which may be created only for those under age 65, pooled trusts may be for beneficiaries of any age and may be created by the beneficiary herself.

In addition to drafting the trust so that it does not disqualify the beneficiary from government means-based benefits, it is important to select a trustee who is well versed in government means-based benefits so that during the administration of the trust the beneficiary does not lose any government benefits. As such, we always recommend the use of a professional fiduciary.

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