Trusts Part 2 – Understanding Special Needs Trusts

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Like other types of trusts, a Special Needs Trust (SNT) is a legal arrangement between a person or financial institution, known as the trustee, that manages or holds the assets of another – the beneficiary.

A Special Needs Trust is unique in that it retains the beneficiary’s eligibility for government-based benefits, such as Medicaid and Supplemental Security Income, because the beneficiary does not own the trust’s assets. In many cases, the trustee will provide additional funds for home care and medical needs for the person that supplement government assistance.

There are two types of SNTs – a first-party and a third-party.

In a first-party SNT, also known as a self-settled trust, the funding source is often from a personal injury settlement or inheritance directly provided to the beneficiary. For the assets of this type of trust not to factor into Medicaid and SSI benefits, federal law requires the beneficiary to be under the age of 65 when the trust is created and funded.

Additionally, the first-party SNT must be irrevocable and state that Medicaid is reimbursed when the beneficiary dies or the trust expires, whichever happens first. This type of SNT must solely benefit the beneficiary.

A third-party SNT, or a supplemental needs trust, is significantly different in a couple of ways. First it is funded with assets belonging to someone other than the beneficiary. Most often, this type of trust is funded from inheritance from family, such as parents or grandparents or from life insurance policies. Second, a supplemental needs trust does not have to repay Medicaid. Instead, the person who establishes the trust decides how the estate is distributed when its beneficiary dies.

All Special Needs Trusts are complex and the language can vary from one trust agreement to another and from state to state. It is well-advised that you consult legal counsel and skilled tax advisors experienced in this area to ensure that your trust document meets the needs of the beneficiary, the funder of the trust and the trustee administering the agreement.

Please call to make an appointment with one of our accountants to assist you with planning for Special Needs Trusts.

 

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