Christopher S. Nudo
What Exactly is a Special Needs Trust and Who is This Intended For?
A special needs trust is for a person with some sort of special need or disability, and it supplements any government benefit the special needs person has. The trust supplements the money that the person is receiving through government programs such as Social Security. A properly drafted special needs trust allows the person with special needs to continue receiving their government benefits, such as Medicaid, Medicare or Social Security, while still receiving some money from the trust.
Are There Different Types of Special Needs Trusts?
There are three different types of special needs trusts. The first is commonly called a ‘first party’ special needs trust, and it is set up for special needs people who have money. This can be through an inheritance, the settlement of a lawsuit, or other ways. The trust is set up so that the person with special needs does not stop receiving government benefits. If they took all of the money outright from the inheritance, settlement, or other situation, it would forfeit their government benefits. By setting up a first-party special needs trust, they can avoid losing their government benefits. However, these trusts are extremely complicated. They have what is called ‘payback provisions’, which allow the government to be repaid after the person with special needs dies. There are many rules that govern this type of trust, but they can be very beneficial if done correctly.
The second kind of special needs trust is a ‘third party’ trust, and it is commonly used by people who are planning in advance for somebody who has special needs. For example, a parent may have a disabled child who is receiving government benefits. The parent will set up a third-party special needs trust, so that when the parent’s wealth transfers to their child, it transfers into this trust for the benefit of their child. By doing this, the child can receive the inheritance from the parents without jeopardizing their government benefits. These types of trusts are often built into living trusts, but they can also be drafted as standalone trusts. One benefit of this type of trust is that they often do not have payback provisions in them.
The third type of special needs trust is a ‘pooled trust’, which is not as common as it used to be, due to revisions in the tax code. Because we no longer prepare this type of trust, I will not go into its description.
Are Special Needs Trusts Irrevocable?
The great majority of special needs trusts are irrevocable. However, there are a number of circumstances in first-party trusts where they are not irrevocable, which can significantly affect the payback provisions. Third-party special needs trusts are far more common, and always irrevocable.
Why is the Choice of A Trustee for A Special Needs Trust so Critical? What Kinds of Trustee Structures Are Available?
It is important to pick a trustee who is trustworthy, and who will have the best interest of the person with disabilities, as their job is going to be monitoring the flow of necessities to that person. Trust money can be used for things such as clothes, toiletries, gifts, and many other needs that are not handled by the government benefits. The trustee will be responsible for communicating with Social Security, Medicaid/Medicare, and other government agencies. The trustee has a very important role, which will be much like a job. It is critical to pick someone whose primary focus is the proper care of the disabled person.
How Do You Ensure the Funds Specifically Established for The Benefit of A Special Needs Child Are Used Properly?
In a first-party trust, there are specific reporting requirements for the money that goes into and out of the trust. Therefore, there is a lot of accountability to ensure the money is being spent according to the guidelines and in the best interest of the disabled person.
In a third-party trust, it is more difficult to maintain accountability, since you are relying solely on the trustee, who is in charge of managing the money. There are few, and sometimes no requirements.
In either type of trust, the trustee is a fiduciary, meaning that any action they take must be in the best interest of the disabled person. If it is ever found that the trustee was not acting in the disabled person’s best interest, then the trustee can be held personally liable for significant damages.
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