A special needs trust (“SNT”), or what is sometimes referred to as a supplemental needs trust, is a legal entity that creates a fiduciary relationship for an individual with a physical and/or mental disability and seeks to provide financial security for the beneficiary without jeopardizing the government benefits that he or she may be eligible to receive.
That’s a bit of a mouthful, so to put it another way:
A SNT is a financial planning tool that can be used to create a financial safe-haven for someone with mental or physical disabilities.
Such a trust allows the disabled individual (or their family members) to put away money for their future needs and do so without negatively impacting their eligibility for means-tested benefits (i.e., government benefits that are available to those with limited financial resources).
There are three central parties involved in a SNT:
1) Grantor – Individual who establishes the trust
2) Trustee – Person legally responsible for the assets in the trust and administering them for the benefit of the beneficiary
3) Beneficiary – Individual who has the legal right to the economic benefit of the assets owned by the trust
Are SNTs a Good Idea?
Yes! Individuals with special needs are living longer than ever before, so it is important for parents to plan for their child’s future or for disabled individuals themselves to plan for their own future needs.
There are two types of SNT you need to know about — First-Party SNTs and Third-Party SNTs.
What is a first-party SNT?
A first-party SNT is funded with assets that belong to the individual with special needs.
For example, an individual funds a SNT from their own financial resources or proceeds they receive from a personal injury settlement. It’s their own money to put into a trust.
First-party SNTs are irrevocable (i.e., once established the trust cannot be changed), and are usually created when an individual would be disqualified from receiving public benefits (e.g., they received a large inheritance or settlement), but for placing the money into the trust.
What is a third-party SNTs?
A third-party SNT is funded with assets from a third-party, such as a parent, grandparent or sibling.
A third-party SNT is often established by a parent or grandparent for the benefit of a person with special needs.
For example, parents of disabled children often establish third-party SNTs to place money into, either by gift or bequest, so the disabled child has the financial resources to provide for their needs without impacting their eligibility for means-tested benefits. In short, third-party SNTs are always funded with someone else’s money or assets.
Note, since third-party SNTs involve money from someone other than the beneficiary’s, these SNTs are much more flexible in how they are administered (i.e., the trustee has more flexibility in what it can pay for from the trust without affecting government benefits).
What are the key differences between first-party and third-party SNTs?
So why does the origin of assets matter?
First-Party SNTs Have to Pay State Medicaid Back
This is the big difference.
Once the beneficiary of the first-party SNT passes away, any remaining funds in the SNT must first go back to reimburse the government in return for the Medicaid benefits, if any, the beneficiary received during their lifetime.
If the SNT cannot fully reimburse the medical expenses Medicaid provided, then the trust is exhausted and dissolved. This means, the trust is terminated upon the repayment of Medicaid and no further assets are distributed.
For example, let’s say Jane lived until 56 and had been receiving a combination of financial help from Medicaid and a first-party SNT since she was 14.
Upon her death, the SNT still had $1 million in assets, but over her life she accrued $1.2 million dollars in state Medicaid expenses. The SNT would be required to disburse the full $1 million to Medicaid first, which will exhaust the trust’s resources. Provided, once the trust is exhausted no one else is responsible for the remaining $200k in Medicaid expenses.
Again, this only applies to first-party SNTs since they own their own assets.
First-party SNTs can only pay out to the beneficiary
The sole benefit rule
In addition, a first-party SNT must be for the “sole benefit” of the beneficiary. As such, payments cannot be made to a spouse or child of a beneficiary.
Section SI 011.20.201 (F) (1) of the Program Operations Manual System (“POMS”) (the primary source of information used by the Social Security Administration (“SSA”) to process claims for Social Security benefits), describes “sole benefit” as the following: “a trust established for the sole benefit of an individual if the trust benefits no one but that individual, whether at the time the trust is established or at any time for the remainder of the individual’s life.”
However, disbursements can be made for services rendered for certain defined items such as legal fees, trustee fees, investment fees, etc. This is defined by current law, and we talk more about that below.
On the other hand, third-party SNTs don’t have to worry about this “sole benefit” restriction.
Third-party SNTs are usually initiated upon death
Another difference is timing. While third-party SNTs can be created before the grantor passes, many third-party SNTs are created and designed to come into effect after a guardian passes away.
This is an important tool for navigating probate and ensuring a loved one isn’t left in a vulnerable position due to delays in the court proceedings.
What Can SNTs Pay For?
One of the more frequent questions asked regarding SNTs and the administration associated with said trust is what the trust can and cannot pay for. The trustee, in a properly drafted SNT, will have the sole discretion over disbursements from the trust, which means the trustee will decide when and how to make disbursements. The most common types of disbursements are for health expenses, educational expenses, and the purchase of a vehicle to assist with transportation.
A more detailed list can be found in the following link: https://secure.ssa.gov/poms.nsf/lnx/0501130050
Cautionary Note: It is extremely important to understand the impacts certain types of distributions may have on a beneficiary’s government benefits.
For example, if a beneficiary receives Supplemental Security Income (“SSI”), a distribution for the beneficiary’s electric bill may cause a reduction in their “SSI” of up to ⅓!
Let’s look at that a bit more.
How SNTs Relate to Government Benefit Programs
There are two types of government benefit programs: needs-based (i.e., Supplemental Security Income, Medicaid) and entitlement (i.e., Social Security Disability Insurance, Medicare).
The Supplemental Security Income (SSI) program provides income to low-income seniors and low-income adults/children with disabilities.
This is a federal needs-based program funded by general tax revenues to assist qualifying individuals in meeting their needs for food and shelter. To qualify, a beneficiary can only have $2,000 in their own name and earn less than $841 per month in income. In 2022, the maximum monthly SSI benefit for an eligible individual was $841.
Since SSI distributions are to be used for food and shelter, distributions from a SNT should not cover items such as food, rent, electricity, water, etc. If such distributions are made, the disabled person’s SSI check may be reduced since the SSA considers these distributions to be In-Kind Support and Maintenance (“ISM”). Note, many states allow individuals who qualify for SSI to automatically receive Medicaid.
Some Thoughts on Social Security Disability Insurance
To qualify for Social Security Disability Insurance (“SSDI”) you must meet one of three qualifications:
- worked for 20+ quarters in the last 10 years and become disabled
- be a minor dependent of a disabled, retired, or deceased worker
- Or be a disabled son/daughter of a disabled, retired, or deceased worker.
SSDI recipients can also receive Medicare after they have qualified for SSDI for 24 months.
Note: disbursements from an SNT to a beneficiary receiving SSDI/Medicare will have no effect on their SSDI/Medicare benefit.
Also, on December 19, 2014, President Obama signed into law the Achieving a Better Life Experience (ABLE) Act. The ABLE account is a 529 plan for certain persons with disabilities.
To qualify, a person must be disabled before their 26th birthday. In 2022, up to $16,000.00 can be placed into an ABLE for a beneficiary. These funds can only be used for qualified disability expenses such as housing, education, health services, etc. Qualified distributions from an ABLE account do not affect a beneficiary’s government benefits.
More information can be found here: https://secure.ssa.gov/poms.nsf/lnx/0501130740
SNTs get complicated fast
As you can see, SNTs, while simple in theory, get complicated fast. That is why, while you can get an okay understanding of some of this, small decisions can lead to big impacts in potential income and benefits.
We highly recommend consulting with legal professionals when establishing SNTs and reviewing current distribution habits involving an existing trust.
Wishing you luck.