This is part II of our III part blog series discussing Special Needs Trusts.
Self-Settled Special Needs Trusts
To provide for the payment of supplemental needs, federal law permits an individual with disabilities to retain his or her resources in one of two types of Special Needs Trusts (SNTs). Without the creation of such trust, the resources would count as an asset of the individual, disqualifying him or her from SSI or Medicaid benefits.The two types of trusts are commonly referred to as (d)(4)(A) and (d)(4)(C) SNTs. These two types of SNTs are self-settled or first-party SNT trusts, meaning that these trusts are funded with the beneficiary’s own funds. A Self-Settled SNT is a trust created (and funded) for the sole benefit of an individual with a disability under the age of 65 by the individual, by the individual’s parent, grandparent or legal guardian, or by a court.The trust is funded with the disabled person’s assets. The trust must provide that the state Medicaid agency will receive amounts remaining in the trust upon the individual’s death up to the amount paid by each state under the Medicaid program for services to the disabled individual.
Pooled Special Needs Trust
A Pooled SNT is a pooled trust created and managed by a nonprofit organization, such as the Arc of Texas. A separate subaccount is maintained for each beneficiary of the trust, but the assets are pooled for investment and management purposes. The subaccount is created for the sole benefit of an individual with a disability by the individual’s parent, grandparent, legal guardian, court, or the individual. The trust is funded with the disabled person’s assets.
Third-Party Settled Special Needs Trusts
A third-party SNT is a special needs trust created and funded with the assets of a person other than the disabled beneficiary. As part of their estate planning, parents, grandparents, or other family and non-family members frequently create and fund third-party SNTs for the benefit of their beneficiaries who have disabilities. The third-party SNT affords the parents, grandparents, or family or friends, the opportunity to preserve the beneficiary’s public benefits and to supplement those benefits. In addition, third-party SNTs provide for the proper management of the gift to the beneficiary with disabilities for the beneficiary’s entire lifetime. At the beneficiary’s death, the property can pass as designated in the will or trust agreement or by exercise of a testamentary non- general power of appointment.
If parents, grandparents or friends execute a third-party SNT, they can designate the Trustee of the SNT as the beneficiary of life insurance policies, annuities, or as a payable-on death (POD) or transfer-on-death (TOD) recipient of bank and brokerage accounts. The parents or grandparents may prepare a letter of intent that details their intentions and desires for the disabled beneficiary’s future.
Differences Between Self-Settled Special Needs Trust and Third-Party Special Needs Trusts
A self-settled SNT differs from third-party SNT in that a self-settled SNT contains the resources of an individual with disabilities, and therefore must contain a mandatory Medicaid payback provision. A third-party SNT can be created by a revocable inter vivos trust agreement, an irrevocable inter vivos trust agreement, or a Will. Generally, a separate inter vivos trust agreement is used to allow other family members (and friends) to use the third party SNT in their estate plans. A Self-Settled SNT must be created by an irrevocable inter vivos trust agreement.
We will have our next installment in this blog series posted soon. In the meantime, if you would like to learn more about Special Needs Trusts, contact Weldy Law, PLLC, for a free initial consultation.
This blog is for informational purposes and does not provide legal counsel nor does it establish an attorney-client relationship.