A special needs trust (SNT) is a legal arrangement whereby an individual or professional fiduciary (the trustee) holds and distributes assets for the benefit of a disabled individual (the beneficiary) pursuant to the terms of the SNT.
Many disabled individuals receive needs-based public benefits such as Medicaid or Supplemental Security Income. The purpose of a SNT is to hold assets that can be used to improve the beneficiary’s quality of life without jeopardizing eligibility for the public benefits.
Types of Special Needs Trusts
There are two types of SNTs – self-settled and third-party. Both require that the beneficiary qualify as “disabled” under the Social Security Administration’s definition of the term. The main difference in the two types of trusts lies in whose money is used to fund it.
A self-settled SNT is funded with the beneficiary’s own assets. For example, when an individual receives a settlement for a disabling personal injury, he or she may use the assets to fund a self-settled SNT.
With the help of an experienced estate planning attorney, a SNT is usually established by the disabled individual’s parent(s), grandparent(s), legal guardian, or by a court of law, but may also be established by the disabled individual. The attorney can provide guidance regarding the appropriate party to establish the SNT.
A self-settled SNT must be established and funded before the beneficiary turns age 65 and assets may not be added to the trust after the beneficiary reaches age 65. This type of trust must also be irrevocable, meaning that it may not be revoked or terminated except by a court order.
Another defining characteristic of a self-settled SNT is that it must include a payback provision. The payback provision states that, upon the death of the beneficiary, the trustee must use the remaining assets in the trust to pay the state an amount equal to the total Medicaid payments made on behalf of the beneficiary. If any assets remain in the trust after payback to the state, distributions are made to individuals or charities as directed by the trust document, a court order, or in the beneficiary’s will.
A third-party SNT is funded with assets belonging to anyone other than the beneficiary and may be established by any third party (called the grantor). Third-party SNTs are often created and funded through the Last Will and Testament of a disabled individual’s parent(s).
A third-party SNT does not have an age requirement for creation and funding. Further, the trust may be drafted as irrevocable or revocable. Upon the death of a grantor, however, a revocable SNT becomes irrevocable. Finally, the third-party SNT does not include a payback provision. Upon the death of the beneficiary, any remaining funds are distributed to the remainder beneficiaries listed in the trust document, as decided by the grantor.
It is extremely important that the individual(s) interested in creating a self-settled or third-party SNT work with an attorney knowledgeable in the areas of estate planning and public benefits. A beneficiary may risk losing benefits due to an improperly drafted trust.
Choosing a Trustee for a Special Needs Trust
Choosing a trustee is one of the most important decisions the parties must make when creating a SNT. A SNT must name either an individual person or a professional fiduciary, such as Trust Point, Inc., to fill that role. Special needs trusts are governed by complex rules and laws. It is critical that the trustee be familiar with fiduciary duties, public benefits laws, investment standards, and trust accounting. A trustee’s improper administration of a SNT may jeopardize the beneficiary’s eligibility for needs-based benefits.
The trustee of the SNT, whether an individual or a professional, has a fiduciary duty to invest and manage the trust assets to ensure there are funds available for the duration of the trust, generally the beneficiary’s expected lifetime. On an ongoing basis, when considering whether to approve distributions, the trustee must take into account the total trust assets, distributions to date, and the age and life expectancy of the beneficiary.
The language in the trust document gives the trustee discretionary authority to make distributions. The language may prohibit distributions that reduce or eliminate public benefits, or the language may allow the trustee to make more flexible distributions that may reduce or eliminate benefits if the trustee decides that such distributions are still in the beneficiary’s best interest. It is important for the trustee to understand the distribution language in the document, because a trustee may be held legally responsible for inappropriate distributions.
The trustee generally has the discretion to make distributions for items that cannot be obtained through public benefits. Such items may include higher quality medical equipment, additional medical services, a more accommodating living arrangement, or better transportation. The trust may also pay for other expenses including legal fees, taxes, therapy, and nursing or in-home care.
A professional fiduciary with SNT administration experience is often the best choice as trustee. Generally, a professional fiduciary will be more familiar with up-to-date laws governing the use of SNTs and can provide peace of mind that the trust is administered properly. Professional trustees help to ensure proper administration through appropriate investment strategies and distributions, thereby preserving eligibility for benefits.
The ABLE (Achieving a Better Life Experience) Act of 2014 gives disabled individuals the opportunity to create a tax-advantaged saving account. The account beneficiary is the owner and the income earned by the account is tax-free. An ABLE account functions like a 529 plan with the funds available for a number of qualified disability expenses versus exclusively education expenses.
To be eligible for an ABLE account, the beneficiary’s disability must have been present before the age of 26. The account may be created after age 26 provided the individual met the Social Security Administration’s definition of disabled prior to age 26. Each beneficiary may only have one ABLE account.
An ABLE account is similar to a SNT in several ways. First, funds in the ABLE account (up to $100,000) are excluded when determining eligibility for needs-based public benefits. Second, assets in the account are available to pay for qualified disability expenses such as education, housing, transportation, assistive technology, health care expenses, and other expenses which help improve the health, independence, and quality of life of the disabled individual. Last, ABLE accounts also include a state payback provision for the amount of Medicaid benefits the individual received from the state.
An ABLE account differs from a SNT in that an ABLE account is less expensive to set up and administer. Also, the ABLE account allows the beneficiary, instead of a trustee, to have control over the funds. Whereas a SNT may be funded with any dollar amount, the annual limit for contributions to an ABLE account equals the annual gift exclusion, currently $17,000 in 2023. Each state also has a maximum funding amount for an ABLE account.
Because the two savings vehicles work well together, many families create a SNT and also open an ABLE account. A trustee may make distributions from a SNT into an ABLE account in order to help the disabled individual build self-esteem and to gain independence. However, the funds in the account are then subject to the payback rule even if the ABLE account is funded from a third-party SNT, which is not subject to the payback provision.
Although both SNTs and ABLE accounts are beneficial for disabled individuals, the administration and management of each can be complex. Working with a trusted partner familiar with SNTs and ABLE accounts can provide peace of mind that each is administered properly. Trust Point administers trust, including many SNTs, and has for over a century. We act as an advocate for our clients and use our knowledge and expertise to help improve the beneficiary’s quality of life while maintaining eligibility for public benefits.
|Special Needs Trust Comparison|
|Self-Settled SNT||Third-Party SNT|
|Source of funds||Disabled individual||Any third party|
|Establishment||Disabled individual, parent, grandparent, legal guardian, court||Any third party|
|Age requirement||Established before age 65||Any age|
|Revocability||Revocable or irrevocable||Irrevocable|
For additional information on ABLE, visit www.ablenrc.org.