NEW: Our Quick Reference Guide to Special Needs Trusts

Posted by Haddad Nadworny on Fri, Apr 02, 2021 @ 07:00 AM

The Special Needs Financial Planning Team John Nadworny, CFP, CTFA | Cynthia Haddad, CFP | Alexandria Nadworny, CFP,  CTFA

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No one can replace a parent.  Having a special needs trust in place will help ensure your child continues to be cared for and live a full life as you age and upon your death.  And remember: the legal documents are just Step 1. A trust must be funded to provide the money for your child's care and supplemental needs. 

 

A QUICK REFERENCE GUIDE TO SPECIAL NEEDS TRUSTS

 What is a special needs trust (SNT)?

  • A trust is a legal document that provides directions and rules for assets held on behalf of a beneficiary or beneficiaries. 
  • These assets are usually bank accounts or investment accounts with stocks, bonds, and mutual funds, or other property such as real estate.
  • A typical trust used in special needs planning is the Special Needs (or the Supplemental Needs) Trust.  This is a trust you, as parents, establish that will allow your child with special needs to receive his/her share of your estate while preserving their government benefits.
    • Key actions:
      • Be sure the trust is properly drafted.
      • Be sure the trust will be adequately funded upon parents/caregiver’s deaths.
      • Be sure your financial planning and legal documents are properly coordinated.
  • If funded properly, the SNT will provide the basis for your child’s future financial security at your death. It will protect their eligibility for government benefits and will make additional money available to supplement their needs. 
    • There are two steps:
      • Identify what your child’s anticipated needs will be.
      • Assess what steps you can realistically take to provide what is necessary in light of your other financial requirements and goals.

Who is involved in setting up a SNT?

  • Trusts create a three-party fiduciary relationship between three parties: the donor, the trustee and the beneficiary.
    • Donor/Creator/Grantor/Trustmaker/Settlor - choose the term you find most clear, but this is the person who creates and funds the trust.​
    • Trustee(s) - the person(s) who will be responsible for managing the special needs trust after your death. ​
    • Beneficiary - the person who is entitled to receive funds from the trust.​
      • Remainder beneficiary- Upon the death of your child, any remaining assets in the trust will be distributed to whomever you name as the successor or remainder beneficiary.

Why set up a SNT?

  • The special needs trust (SNT) allows you to leave an inheritance to your child without disqualifying him or her for government benefits. 
  • You can direct any share of your estate to be distributed to the special needs trust, including your house (although in many cases, this is not a recommended planning strategy), savings and investment accounts, life insurance proceeds, and/or retirement plans.
  • You do not have to disinherit your child or leave his or her share to another person to direct the funds for your child's benefit. 

What types of SNTs are there?

  • There are three types of special needs trusts: third-party special needs trusts, first-party special needs trusts, and pooled trusts.
    • Third-Party Special Needs Trusts
    • A third-party special needs trust (SNT) is the most common trust used in special needs planning.
    • It is often established by parents, grandparents or other people wishing to gift money or leave an inheritance to the beneficiary (your child) without disqualifying them for government benefits.
    • During their lifetime, the trust will serve as a source of money to supplement your child's government benefits and may provide for additional care providers, care managers, special foods or supplements, non-covered medical expenses, therapies and equipment, entertainment, hobbies, trips, and other items to enhance their life.
    • There are no Medicaid pay-back provisions in a third party SNT.  The trustee is responsible to know what they can and cannot provide for the beneficiary.
    • Trustees must know the rules and not to provide any money directly to the beneficiary. The trustee may pay directly to the vendor or provider of services. One simple example is haircuts. The trustee may pay directly to the salon but may not give money to the beneficiary to pay for their own haircut, which could potentially disqualify them for certain government benefits.    
  • First-Party Special Needs Trusts
    • A first-party special needs trust (SNT) is allowed under OBRA ’93 and known as (d)(4)(A) Trusts, Pay-back Trusts, or more recently, as Self-Settled Trusts.
    • This trust document allows any inheritance, legal settlement, or other assets held or received by an individual with disabilities to be deposited to this self-settled trust while allowing the individual to maintain or become eligible for certain government benefits.
    • At one time only a parent, grandparent, or court could establish such a trust, but with more recent legislation, the individual may establish their own first-party SNT.
    • The funds may only be used for the sole benefit of the beneficiary. Upon the death of the beneficiary, any remaining assets in the trust would first be subject to pay-back for Medicaid expenses rather than to family members. The distributions and provisions of these trusts are a bit more complicated; establishing and administering them often requires additional legal guidance.
    • When an individual has both a first-party SNT with a pay-back provision and a third-party SNT where there are successor beneficiaries named in the document, distributions must be made carefully as the rules are a bit different. This is where your choice of trustee or co-trustees and your financial planner or investment manager is critical; they should know the purpose of the trust and the difference between each trust.
    • Pooled Trusts
    • A pooled trust, also known as a (d)(4)(C) trust, is for individuals with disabilities and established and managed by a non-profit organization. Assets are combined and invested together, and funds are spent on beneficiaries in proportion to their share of the total trust amount.
    • Pooled trusts are available to individuals over age 65 who receive Medicaid or SSI.
    • When the beneficiary dies, there is no Medicaid pay-back provision, however, the non-profit organization will retain a portion of the funds remaining.
    • This option is appropriate for the beneficiary who has no other viable trust options. To find a pooled trust in your state, or your child’s state of residence, please visit specialneedsanswers.com (The Academy of Special Needs Planners, 2020) or specialneedsalliance.org (Special Needs Alliance, 2020) to find a directory of pooled trusts by state.

When and how should the trust be funded? 

Trusts may be funded in various ways and, in most circumstances, the SNT is funded at the death of the parent(s) or primary care giver, rather than during their lifetime. 

A trust is like a bucket that must be filled and you provide direction to the trustee(s) as to how the money in this bucket is to be distributed. Keep in mind that without making provisions for assets to be directed into the trust, you would provide only an empty bucket.

  • Incorporating trusts in your estate planning documents can be complex, it is wise to follow up with your attorney and your financial advisor to implement the provisions of your estate plan. 
  • Reasons for NOT funding the trust during a donor’s lifetime include:
    • Once a trust is funded, the money can only be used to meet the beneficiary’s supplemental needs. 
    • A separate tax return must be filed.
    • Taxes on any earnings must be paid by the trust. Income earned in the trust is usually taxed at a higher tax rate than an individual rate.
    • Once a trust is funded, it becomes irrevocable. This prevents you from making any changes to the terms of the trust.
    • Overall, it dramatically decreases any flexibility in your plan.
  • Reasons to consider funding a SNT during the lifetime of the donor as a planning strategy: 
    • If the individual funding the trust has more than enough money to meet his/her personal needs and funding the trust will not jeopardize their personal financial security.
    • The donor will have the comfort of knowing that there will be money set aside and available for the beneficiary.
    • Parents with taxable estates who are implementing strategies to reduce their estate tax liability.
    • Grandparents or others trying to reduce their taxable estate by gifting to your child – the SNT will protect the child’s eligibility for government benefits.
    • Money in the trust can provide some protection from creditors. 
    • Money directly received by the child either through an inheritance and/or a legal settlement which would otherwise disqualify them for benefits. This would be a “payback” SNT.​​

For additional information about incorporating special needs trusts into your planning: 

            A Parent's Guide to Setting up a Special Needs Trust                

 

Tags: Special Needs Trusts