A Brief Introduction to Special Needs Trusts

A Brief Introduction to Special Needs Trusts

What is a Special Needs Trust?

A Special Needs Trust (SNT) is a tool used to provide financial support to an individual with a disability. The goal of the SNT is to preserve eligibility for needs-based government benefits, including Medical Assistance (MA) and Supplemental Security Income (SSI), while providing the beneficiary with the resources to supplement such government benefits. If the SNT has the proper provisions, the assets within the trust may be excludable from the assets of the beneficiary for the purpose of determining eligibility for MA and SSI.

As the purpose of the trust is to supplement the benefits provided by MA and SSI, and not replace them, distributions should be for support beyond the basic needs covered by these programs. If distributions are for expenses of basic needs, government benefits may be reduced accordingly. A few examples of expenses that exceed the basic needs covered by MA and SSI include excess medical and dental expenses, medical equipment, education and training, and special dietary needs.

There are different types of SNTs, each with their own rules and requirements – below is a brief overview of common types of trusts.

Self-Settled Trusts

A Self-Settled Trust, also referred to as a First Party SNT, is an irrevocable trust funded with assets or income that belong to the individual with a disability. The beneficiary of this type of SNT must be classified as disabled by the Social Security Administration and must be under the age of sixty-five when the trust is established. This type of SNT must also include payback provisions to the Department of Health Services (DHS), when the trust terminates, for an amount equal to the MA received by the beneficiary during their lifetime.

Supplemental Needs Trusts

Supplemental Needs Trusts, also referred to as Third Party Trusts, are funded with resources from someone other than the beneficiary. Similar to a Self-Settled Trust, the assets in the trust may be excludable from the beneficiary’s resources when qualifying for needs-based government benefits, but unlike the Self-Settled Trust, Supplemental Needs Trusts often do not require Medical Assistance payback provisions. The contingent beneficiary of a Supplemental Needs Trust can be anyone, including beneficiaries without a disability.

Pooled Trusts

Pooled Trusts are often used if the cost associated with either of the trusts previously mentioned is not feasible given the resources available. A Pooled Trust is typically managed by a non-profit organization, which combines the resources of many beneficiaries into a single trust, often reducing administrative expenses. Each beneficiary will have their own sub-account that can be used for their benefit and shares in the investment performance of the trust. Sub-accounts can be funded by the beneficiary’s own resources (first party) or by the resources of someone other than the beneficiary (third party). Assets remaining in the beneficiary’s subaccount upon their death are typically retained by the trust or used to payback DHS for the medical assistance received by the beneficiary throughout their lifetime.

Each of these types of trusts can provide a unique benefit and your financial advisor can help you determine which is most appropriate for your situation.

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