Why You Should Choose a Third-Party Trust

Takeaways

• Third-party special needs trusts (SNTs) are legal tools designed to manage assets for people with disabilities while preserving their eligibility for government benefits such as Supplemental Security Income and Medicaid.

• Unlike first-party SNTs, third-party SNTs are funded by someone other than the beneficiary and do not require a “payback provision” to the state.

• Key considerations for setting up a third-party SNT include choosing a knowledgeable trustee, planning for the beneficiary’s long-term well-being and unique needs, ensuring the trust is flexible, and drafting a letter of intent to guide the trustee.
• It’s crucial to work with a professional team, including a special needs planning attorney, care manager, life care planner, and financial planner, to ensure the SNT is legally compliant and effectively supports the beneficiary.

What Is a Special Needs Trust?

A special needs trust (SNT) is a specific legal tool created to manage assets for people with disabilities. Its main goal is to protect the individual’s eligibility for crucial government assistance programs like Supplemental Security Income (SSI) and Medicaid, which have strict income and asset limitations.

There are three main types of special needs trusts:

• First-party SNTs: These trusts hold the assets of the person with the disability themselves. They are typically established when a person with a disability receives a settlement, inheritance, or other funds directly. A key requirement for first-party SNTs is a “payback provision,” meaning that upon the beneficiary’s death, any remaining funds must first be used to reimburse the state for Medicaid services provided.
• Third-party SNTs: These trusts are created and funded by someone other than the person with the disability (e.g., a parent, grandparent, or other family member). The assets in a third-party SNT are not considered the beneficiary’s, thus preserving their eligibility for public benefits. These trusts do not require a “payback provision” to the state upon the beneficiary’s death.
• Pooled trusts: Pooled special needs trusts hold the assets of many people with special needs and are managed by a nonprofit organization.

Why Is a Special Needs Trust Important?

For individuals with disabilities who rely on public benefits, a special needs trust can prove crucial. Without it, receiving an inheritance, gift, or settlement could render them ineligible for vital government assistance that covers health care, housing, and daily living expenses. An SNT allows these funds to be used to enhance the beneficiary’s quality of life without disrupting their public benefits.

When Should You Consider a Third-Party SNT?

A third-party SNT is generally recommended if the individual with a disability:

• Receives or is likely to receive means-tested public benefits: This includes SSI, Medicaid, and other programs where income and asset limits are a factor.

• Has family or friends who wish to contribute financially: A third-party SNT provides a safe vehicle for loved ones to provide for the individual without risking their benefits.

If the individual only receives benefits like Social Security Disability Income (SSDI) and Medicare (which are not means-tested), an SNT may not be strictly necessary for preserving benefits. However, it’s still worth considering if there’s a future possibility of needing custodial care funded by Medicaid.

Key Considerations When Setting Up a Third-Party SNT

1. Choosing a trustee: The trustee is responsible for managing the trust and making distributions. This is a significant role, requiring knowledge of public benefits, financial management skills, and a commitment to the beneficiary’s well-being. While family members can serve, a professional fiduciary or institutional trustee (like a bank or trust company) is often recommended, especially for larger trusts, due to their expertise and impartiality.
    

2. Thinking long-term: An SNT should serve as an all-encompassing plan that focuses on the individual’s long-term well-being. This involves considering the following:

   • The beneficiary’s unique physical, emotional, social, and spiritual needs as well as their specific abilities and limitations
   • The family’s hopes for the beneficiary’s health and independence
   • Potential future care needs, such as housing, medical care, and support systems
   • Maximizing all available public benefits to leverage the trust’s resources
      
3. Flexibility is key: Laws and individual circumstances can change. An SNT should be drafted with flexibility in mind – for example, by allowing for modifications by the trustee or a trust protector – to adapt to new situations or legal requirements.
    
4. Writing a letter of intent: Consider drafting a detailed letter of intent. In this nonbinding document, you can provide invaluable guidance to the trustee, outlining the beneficiary’s preferences, medical requirements, routines, support network, and even your hopes for your loved one.

Legal Requirements for a Third-Party SNT

To ensure the SNT is effective in preserving public benefits, it must be discretionary. This means that the trustee must have sole, absolute, and unfettered discretion over distributions. The beneficiary cannot have the power to revoke the trust or to control the use of its assets for their own support.

In addition, the assets in the trust must come from someone other than the beneficiary.

Work With a Professional Team

Developing a robust SNT often benefits from a team approach. Consider collaborating with:

• A special needs planning attorney: To draft the SNT and ensure legal compliance

• A care manager or benefits specialist: To identify and secure all available public benefits
• A life care planner: To estimate future care costs
• A financial planner: To assess financial resources and plan for the trust’s longevity

Creating a special needs trust is a profound act of love and foresight. By taking a holistic approach and working with experienced professionals, you can establish a plan that provides true peace of mind and ensures a fulfilling life for your loved one with special needs.

To learn more about special needs planning, check out the following articles:

• Special Needs Trusts as a Safeguard for Medicaid Eligibility
• The Benefits of Establishing a Special Needs Trust Early
• What Can an SNT Pay for Without Affecting SSI or Medicaid?
• Key Documents for Parents of Children With Special Needs
• Estate Planning for Parents of Children With Mental Illness