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There are three different types of Special Needs Trusts which must be considered when planning to preserve a disabled person’s right to receive Medical Assistance, Supplemental Security Income and/or Mental Health and Mental Retardation benefits. The first type of Special Needs Trust is a Third Party Special Needs Trust which is typically created for the benefit of a disabled person and funded with money or other assets from a third person such as a parent or grandparent. A Third Party Special Needs Trust cannot be funded with the assets of the disabled person. The Trust can be created as a separate trust which can either be funded by a gift from the third party to the Trust during his or her lifetime or through the third party’s bequest to the Trust upon his or her death. The Trust can also be created under the terms of a Will which is funded at the death of the third party. A Third Party Special Needs Trust must provide that all distributions are to be made at the discretion of the trustee, and that such distributions shall be made to supplement, and not supplant, the benefits the disabled person is receiving or may receive in the future. A Third Party Special Needs Trust should be considered whenever a family member wants to leave assets to the disabled person upon the family member’s death. If proper planning is not done, and the disabled person receives the inheritance outright, then a First Party or Self-Funded Special Needs Trust must be created to preserve any governmental benefits.
The second type of Special Needs Trust is a First Party Special Needs Trust or more commonly referred to as a Self-Funded Special Needs Trust. Self-Funded Special Needs Trusts were first authorized under the Omnibus Budget Reconciliation Act of 1993, and are now permitted under federal statute, specifically 42 U.S.C. §1396p(d)(4)(A). A Self-Funded Special Needs Trust is funded with assets belonging to the disabled person and is typically created when a disabled person receives proceeds from a lawsuit or receives an inheritance outright which would otherwise cause the disabled person to lose the government provided benefits that were being received. Some of the requirements for establishing a Self-Funded Special Needs Trust are:
Any remaining assets not used to pay back Medical Assistance benefits can pass to whoever is named as the contingent beneficiary(ies) under the terms of the Trust.
The third type of Special Needs Trust is a Pooled Trust. A Pooled Trust can either be established by a third party with funds belonging to the third party, or it can be self-settled and funded with the assets of the disabled person. If a self-settled Pooled Trust is the type of trust that is chosen, it must be created by a parent, grandparent, guardian, court or the disabled person. A Pooled Trust combines the assets of numerous disabled persons for investment purposes only, but each person has his or her own account within the Pooled Trust. A Pooled Trust is ideal in a situation where the total value of the assets that are to be placed in trust do not justify the creation of a separate Special Needs Trust as described above. A nonprofit agency must serve as the trustee of the Pooled Trust. Upon the death of the disabled person, the balance held in the Pooled Trust account must remain in the Pooled Trust for the other disabled beneficiaries of the Pooled Trust.
A Special Needs Trust should be a part of a person’s estate plan if any assets are going to be left to a person who is disabled and who is entitled to, or may be entitled to in the future, Medical Assistance, Supplemental Security Income and/or Mental Health and Mental Retardation benefits. For most families, it is important to provide for the ongoing care and support of a disabled loved one, and through the use of a Special Needs Trust, families can leave assets for the benefit of a disabled family member, and the disabled family member can still receive government benefits and programs.
This blog post has been prepared and published for informational purposes only. None of its content should be construed as or relied upon as legal advice. Therefore, no one should act or refrain from acting based on its content. The content is not a substitute for competent legal advice. For legal advice or answers to specific questions, please contact one of our attorneys. Information provided by our attorneys should only be considered legal advice after a formal attorney-client relationship has been established with our law firm and you and confirmed in writing by one of our attorneys.