photo of dictionary text of word Trust
Planning for an individual with special needs requires a myriad of factors to be taken into consideration in order to obtain and to achieve the best and most appropriate outcome for that individual. In the majority of cases, the individual seeking to do planning is doing so to either maintain a government they are receiving or to obtain government benefits. This article will set forth an overview of Special Needs Trusts (SNTs), as well as some alternative planning options to establishing an SNT.

Special Needs Trusts

First Party SNT
The purpose of a First Party Special Needs Trust is to maintain government benefits, such as Medicaid and Supplemental Security Income (“SSI”). The assets in the Special Needs Trust (and any income generated from those assets) are to be used for the benefit of the beneficiary with special needs to supplement rather than duplicate or replace government benefits.

A First Party Special Needs Trust is available to individuals who are disabled and under the age of 65 years. The trust must be funded with the assets of the individual who is disabled and must be created for his or her benefit by a parent, a grandparent, or a legal guardian of the individual or a court. The trust must be for the sole benefit of the individual who is disabled. Lastly, the trust must contain a payback provision to the states for Medicaid paid.

The Special Needs Trust authorized by OBRA 1993 is exempt for Medicaid eligibility purposes and the funding will not affect the Medicaid eligibility of the individual. It is important to take note that if a Special Needs Trust is created for an individual who is under the age of 65, that trust will remain exempt if the individual lives beyond the age of 65. However, any assets added to the trust after the individual reaches age 65 will be subject to the Medicaid transfer penalty rules.

The Special Needs Trust must contain a payback provision to the States. Upon the death of the individual, any balance left in the trust must be paid back to the States in an amount not to exceed the Medicaid benefits paid on behalf of the individual. Any remaining Trust assets would pass according to the Trust (i.e., family members of the beneficiary).   

Third Party SNT
A Third Party SNT is established for the benefit of a person with special needs. Unlike the First Party SNT, this Trust is funded with the assets of the third party, not the beneficiary of the trust (such as parents of a child with special needs). Further, there is no payback to Medicaid which allows the Settlor (the third party who established the Trust) to control the disposition of the trust assets upon demise of the beneficiary.

The purpose of a Third Party SNT (similar to the First Party SNT) is to supplement the needs of the beneficiary with special needs while maintain government benefits. The funding and use of the trust funds will have no adverse effect on the beneficiary's benefits (i.e., Medicaid eligibility) because the beneficiary's money is not being used to create the trust.  There may be an adverse impact on the beneficiary’s SSI under certain circumstances.

A Third Party SNT may be used:

        a.  By a parent, other relative or friend who creates and funds a Third Party Special Needs Trust for an individual with special needs. Since there is no payback provision, the individual setting up the Trust may include their Testamentary desires, including bequests. Additionally, if there are other people who wish to make gifts or bequests to the individual with special needs, such gifts or bequests can be made to the trust, now or in the future without effecting eligibility for programs such as Medicaid or SSI for the individual with special needs.  This trust is an ideal vehicle to be funded with Life Insurance on the life of the grantor.

        b. To benefit an individual (typically a senior) as well as the person with special needs in connection with Medicaid eligibility for both of them. After a period of five years, the assets that were used to fund the Trust will now be protected in the event the individual setting up the Trust needs long term care from Medicaid (such as nursing home care).

Benefits and Potential Negatives to setting up SNTs
Some of the benefits of utilizing an SNT include asset management and maximizing and maintaining government benefits (including Medicaid and Supplemental Security Income). Some possible negatives of utilizing an SNT include lack of control and difficulty or inability to identify an appropriate Trustee.

Alternatives to Establishing a Special Needs Trust

For many, the Special Needs Trust option will be the favored approach but alternatives should always be considered. There are various alternatives to consider, rather than establishing an SNT. In certain circumstances, one option would be to allow for an outright distribution of assets to the person with special needs. The individual may continue to hold the assets directly or ultimately embark on divesture planning. This option may be detrimental to the person with special needs because of the adverse impact on government benefits and/or the inability to properly manage the assets.

Further, one may consider disinheriting the person with special needs and/or leaving assets to a third party outright to hold for the person with special needs. This option may be detrimental to the person with special needs because the recipients of the assets may not use them for the person with special needs.

When deciding on an action plan it is important to consider the facts and circumstances involved in each individual case. A financial advisor working with an experienced special needs planner can educate and advise you on a plan that meets your needs on both a practical and a legal level.  

Original article written by Vincent J Russo, J.D., LL.M. in Tax, CELA and Kim Christian, Esq. of Vincent J. Russo & Associates, P.C., Long Island’s Signature Elder Law, Special Needs and Estate Planning Law Firm with offices located on Long Island and in New York City, New York.