Overview of Special Needs Trusts
Individuals with special needs face complex challenges throughout their lifetimes. That’s why most families caring for a loved one with special needs rely on support from Medicaid and Supplemental Security Income (SSI). Though vital, these benefits do not cover all of the needs an individual with special needs has. However, gifted or inherited dollars from friends, families or charitable organizations can result in disqualification for public entitlements, given the strict eligibility requirements. A special needs trust (SNT), sometimes also called a supplemental needs trust, administered by a trustee on behalf of the individual with special needs can make all the difference.
What Is a Special Needs Trust?
Though monetary gifts can enhance quality of life for an individual with special needs, it’s critical to carefully plan out how the gift is actually made. As attorneys at Burner Prudenti Law point out, receiving funds directly can end up disqualifying special needs individuals from eligibility for dollars and services from Supplemental Security Income (SSI) and Medicaid programs, despite the reality that “these public monetary benefits provide only for the bare necessities such as food, housing and clothing.”
To close the gap between what public benefits provide and what real life costs, a Special Needs Trust (SNT) can be established. Gifts intended for the special needs individual are then held in the trust, and administered by a designated trustee on behalf of that individual–the beneficiary of the trust. The Special Needs Alliance shares these pointers about special needs trusts:
- A trust is a legal arrangement in which a person or a financial institution, called the trustee, holds and manages assets for the beneficiary … .The trust document explains the trustee’s authority, how the trust is to benefit the beneficiary, and how and when the trust is to terminate.
- Grantor — A grantor is the person who creates and funds the trust. This person is also commonly referred to as a settlor or trustor.
- Trustee — A trustee is the person or entity who manages the trust assets and administers the trust provisions. A trustee can be a family member, friend or colleague of the beneficiary, a professional, or a combination of the two.
- Beneficiary — A beneficiary is the person for whose benefit the trust is established.
- The language used in special needs trusts can vary greatly from one trust agreement to another and from state to state.
What’s The Difference: First and Third Party Special Needs Trusts?
A relative, friend or donor can create and fund a third party special needs trust, naming an individual with special needs as the beneficiary. In addition to ensuring the immediate needs of the beneficiary are addressed, a third party special needs trust can be set up to continue distributing funds even after the grantors die. On the other hand, a first party trust is typically used when an individual with special needs has received funds, perhaps from an inheritance or legal settlement, that jeopardize benefits eligibility. Burner Prudenti Law offers this summary of how first and third party special needs trusts differ:
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- A first party special needs trust…is established with the disabled individual’s own assets. This type of trust is often used when a disabled individual receives a settlement or… award as a result of a lawsuit or inheritance.….One key feature of a first party special needs trust is that upon the death of the beneficiary, any remaining funds in the trust must first be used to reimburse the state for any Medicaid benefits received by the beneficiary during their lifetime.
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- A third party special needs trust is a type of trust that is created by someone other than the disabled individual, such as a parent or grandparent…Unlike a first party special needs trust, there is no requirement to reimburse the state for Medicaid benefits received by the beneficiary upon their death….This type of trust can be a valuable tool for ensuring that a disabled loved one is provided for financially after the creator’s death….
How Are Funds In A Special Needs Trust Distributed?
Importantly, the trustee of an SNT cannot give cash directly to the beneficiary. Instead, the trustee uses trust funds to pay third-party vendors directly for goods and services for the beneficiary. For example, the provisions in an SNT may address these types of expenses:
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- Housing & Comfort: Home purchases, repairs, utilities, and household goods.
- Healthcare & Mobility: Uncovered caregivers and medications, specialized dietary needs, transportation, or vehicles.
- Lifestyle, Connection to Others & Fun: Education, hobbies, travel, entertainment, phones, computers and software, hobbies and memberships.
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In addition to honoring the provisions of the trust, the trustee of an SNT must also fully understand state eligibility guidelines for the entitlements the beneficiary is receiving, and avoid using the funds of the trust to pay for anything that the government benefits already provide.
The Trustee Role and Trustee Bonds For Special Needs Trusts
The trustee for a special needs trust is key to the ultimate success of the trust in meeting the needs of the beneficiary. The National Law Review counsels: “In selecting your trustee, the most important qualifications are loyalty and competency in administering the trust. The trustee is the quarterback of the plan who can hire financial advisors, attorneys, accountants, bookkeepers, social workers, and care managers. The trustee can delegate, but must oversee everything.”
Attorneys at Larson, Brown & Ebert also advice extra diligence in selecting one or more trustees for a special needs trust, noting that the duties of the trustee entail:
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- managing the day-to-day operations of the SNT,
- making distributions to the trust’s beneficiary,
- investing the trust’s assets, and
- paying the trust’s bills.
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Though the trustee of a special needs trust can be an adult relative or friend of the family, it’s critical for the individual to understand that they are taking on a legal responsibility, entailing fiduciary obligations, “the most important of which are the duties of loyalty and care, and the duty to act in accordance with the terms of the trust agreement.”
Larson, Brown & Ebert point out that depending on the circumstances, it can be helpful to appoint a professional trustee to a special needs trust, either in addition to a friend or relation, or instead of one: “Professional trustees can be an attorney, accountant, trust company, investment firm, bank, or private professional fiduciary. With a professional serving as a trustee, you can rely on the expertise of that individual or institution. They will have a deep understanding of public benefits programs, investments, money management, and tax planning.”
A trustee can be required to secure a type of fiduciary bond, referred to as a trustee bond, which serves as a financial guarantee that duties will be performed in accordance with the law. Specifically, according to the Special Needs Alliance, a trustee bond “provides protection to the beneficiary against the possibility of fraud, negligence or loss of trust assets by the trustee….” In the event a trustee fails to fulfill their duties, a trustee bond ensures the beneficiaries are financially compensated.
Specifically, a trustee bond is a formal agreement involving three parties:
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- The Principal (Trustee): The person responsible for managing the trust.
- The Obligee (Beneficiaries): The individuals whose interests are being protected.
- The Surety (Bond Company): The entity providing a financial guarantee that the trustee will perform their duties faithfully.
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