What is a special needs trust? - Sykes Elder Law

Certified as an elder law attorney by the National Elder Law Foundation under authorization of the Pennsylvania Supreme Court

Certified as an elder law attorney by the National Elder Law Foundation under authorization of the Pennsylvania Supreme Court

People with disabilities often have particular needs for services and supports, beyond the basic necessities of life. One way for family and friends to support people with disabilities is to set up a trust to help provide funding for those needs, or to pay for things that will improve quality of life.

A special needs trust holds funds used to benefit a person with disabilities (called a “beneficiary”). It is governed by a trust document that specifies how those funds can be used. A trustee is named to manage the trust and make distributions to help the beneficiary.

Protecting access to public benefits

Special needs trusts often have provisions to ensure that the beneficiary will not lose public benefits.

That’s because some public benefits programs benefitting the disabled, such as Medicaid or Supplemental Security Income (SSI), have restrictions on how much a recipient can own, or receive in income. (These are called means-tested programs.)

Grandma may think she’s helping her Suzie, her autistic granddaughter, with a handsome inheritance, but the inheritance could cause Suzie to lose her medical benefits because she would have too much money. Suzie may have to spend down her inheritance to pay for medical care that was previously covered, and then go back on benefits with her inheritance exhausted.

If a special needs trust is set up the right way, Suzie can often keep her benefits and the trust can pay for a variety of supports and service that will improve Suzie’s quality of life for years to come.

Types of trusts

Trusts for the benefit of those with special needs come in different varieties. Most, however, fall into one of three categories.

First party trusts. (Also called “self settled” or “payback” trusts.) This type of trust is created when a person uses his or her own funds, or funds earmarked to go to that person, to establish a special needs trust.

For example, Joe was injured in a severe accident and is now a paraplegic. Joe may later receive an inheritance or a payout from a personal injury lawsuit. Joe may want to establish a special needs trust to avoid losing public benefits he receives now, or might receive in the future.

Keep in mind that a first party special needs trust for Joe can be established only if Joe is under age 65 at the time.

These trusts are sometimes called “payback” trusts because they must contain a provision that when the beneficiary dies, any amount remaining in the trust must go to pay back the state for the value of any public benefits the beneficiary received. If anything remains after that payback, it can go to other beneficiaries, such as family members.

Sometimes you will hear people call first party trusts “(d)(4)(A)” trusts, referring to 42 U.S.C. §1396p(d)(4)(A), which was part of the Omnibus Budget Reconciliation Act of 1993, or “OBRA ‘93.” That federal law exempts certain trusts from being considered the property of the beneficiary for public benefits purposes.

Third party trusts. When the funding for a special needs trust comes from someone besides the beneficiary, that’s called a third party trust.

The typical situation is for a parent, grandparent, or other relative to give the money for the trust. The person establishing the trust may do so while alive, or at death with a provision in his or her will.

Unlike a first party trust, a third party trust does not need to be a payback trust. Instead, any amount remaining when the beneficiary dies can go to others, perhaps the beneficiary’s brothers and sisters, with no requirement to pay back the state for public benefit costs.

Also unlike first party trusts, the beneficiary can be any age – even over 65 – when the trust is established.

Pooled trusts. A special needs trust can also be established as a “pooled” trust with an approved nonprofit association. Funds in this type of trust are pooled together with other special needs trusts for investment purposes, but a separate account is maintained for each beneficiary.

Funds to establish a pooled trust account can come either from the beneficiary or from a third party.

A pooled trust is often used when the amount of the trust is relatively small. Administrative fees for trust management can be lower due to efficiencies and shared costs, and the cost of establishing an account in a pooled trust are often minimal.

Nonprofits operating pooled trusts are permitted to retain funds of deceased beneficiaries to assist other persons with disabilities, but not all of them do. When a beneficiary dies, funds remaining in that beneficiary’s account go to pay back the state for any Medicaid benefits the beneficiary received, unless the trust retains those funds.

The legal shorthand for a pooled trust is a “(d)(4)(C)” trust, referring to 42 U.S.C. §1396p(d)(4)(C).

Which is the right one?

Whether to establish a special needs trust, and is so what type, can be a complicated decision, often taking into account such considerations as the amount of money involved, the source of the funds, the beneficiary’s age, type of disability, type of benefits (if any) the beneficiary receives now or could receive in the future, and a number of other factors. Objectives vary from client to client.

For this reasons, it’s best to consult an experienced professional in your jurisdiction before establishing a special needs trust.

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