What is a special needs trust?

A special needs trust (SNT) may go by different names (e.g., special needs trust, supplemental needs trust, d(4)(A) trust, pooled trust). What makes a trust and SNT is not its name, however, but what it is designed to do.

An SNT is a trust that enables someone with disabilities to hold assets without affecting their eligibility for means-tested public benefits such as Medicaid or Supplemental Security Income. While assets held by the trust are not “countable” for the purpose of qualifying for such programs, there are strict regulations about disbursements from an SNT. SNTs are meant to supplement the funds and services available through government programs.

There are two main categories of SNTs: i) first-party SNTs; and ii) third-party SNTs. The distinction is who the assets belonged to prior to transferring them to the trust.

A first-party SNT (also called a self-settled or d(4)(A) trust) is created with assets belonging to an individual with disabilities. These assets are typically funds from a personal injury settlement or inheritance. To create a first-party SNT, the disabled individual must be under 65 at the time that the trust is established; the trust must be used only for the disabled beneficiary; and any funds remaining in the trust at the beneficiary’s death must reimburse Medicaid for services to that individual before distributions to anyone else.

A third-party special needs trust (also commonly called a supplemental need trust) is created by someone other than the disabled individual and funded with assets owned by anyone other than the disabled individual (e.g., parents or grandparents). These trusts can be created and funded during the life of the creator or upon creator’s death as part of the creator’s Will or Trust. Other than where the assets come from, the other main distinction between a third-party and first-party trust is what happens at the beneficiary’s death. A third-party trust does not need to reimburse Medicaid, so any remaining funds can be distributed to other beneficiaries.

A pooled SNT can be either a first-party or a third-party SNT. A pooled SNT is distinguished by who manages the trust. A nonprofit corporation manages a pooled SNT, working closely with a corporate trustee. A pooled SNT is made up of multiple sub-accounts, each sub-account belongs to an individual beneficiary, who must be disabled in accordance with Social Security Administration guidelines. The ability to “pool” together multiple sub-accounts make a pooled SNT a great alternative for small trusts or trust where finding a suitable trustee may be difficult.

If you would like to discuss how an SNT may be useful for your estate plan, please contact our office today.