IndUStrY InSIGHt
Special Needs Trusts
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A WAY TO PROVIDE FOR YOUR DISABLED CHILD
A
By Laura Cohen, esquire
ccording to Congressional Research Service, some 43 million
Americans have one or more physical or mental disabilities.
As such, special needs trusts and special needs planning is a
growing area of law.
Many persons with disabilities are receiving or are eligible for meanstested public benefits such as SSI, Medicaid, Section 8 housing and other
benefits under state or federal programs. These disabled individuals
can only receive these benefits if their income and assets do not exceed
certain limits. Special needs trusts enable disabled persons to receive
inheritances, equitable distribution, alimony, child support, and personal
injury settlements while still remaining eligible for their means-tested
benefits.
There are three basic types of special needs trusts: third party trusts,
self-settled trusts and pooled trusts. The main difference between the
third party trust and the self-settled special needs trust is the source of the
funds. If the assets funding the trust are not the assets of the beneficiary
but belong to a third party (Mom wants to put some of her money away
for the disabled child) then the trust is a third party trust. If the assets
funding the special needs trust are assets of the disabled beneficiary, then
the trust is a self-settled trust.
THIRD PARTY FUNDED TRUSTS
The Third Party Funded Trusts are created and funded by a third party,
someone other than the individual with disabilities, the individual’s
spouse, a legal guardian or a court. These trusts are often created and
funded by relatives whether in their wills or while they are alive. The trust
must be written to give the trustee discretion to spend or retain the funds
except the trustee is directed not to spend funds in a manner that reduces
government benefits. The trustee will supplement but not supplant
government benefits. The person establishing the trust, called the settlor,
can direct who will receive any assets that remain at the beneficiary’s
death.
It is very important to remember that this trust cannot be self-funded
by the disabled beneficiary. A Third Party Funded Trust is an effective
tool but requires advance planning.
SELF-SETTLED TRUSTS
A self-settled special needs trust is established with the assets of the
person with the disability. It is for the benefit of an individual who is
disabled and under 65 years of age.
• The trust can only be established by a parent, grandparent, legal
guardian or court.
• At the beneficiary’s death, any remaining funds in the trust are first
used to pay back the state for medical assistance received.
This trust can be self-funded but not self-created. It can be self-funded
since funds that would otherwise make the individual ineligible for SSI
or Medical Assistance (such as inheritance, life insurance, etc.) can be
placed in this trust and are no longer considered assets. The trust must be
irrevocable and only the individual with disabilities can be a beneficiary.
The trustee can be a family member, a for-profit corporate fiduciary or a
nonprofit corporate fiduciary.
At the beneficiary’s death, the commonwealth must be repaid for
medical assistance paid by the state for the individual. If there are funds
remaining after the state has been repaid the remaining funds can be
distributed as the trust dictates.
POOLED TRUSTS
Since this trust is established by statute, the trust must meet the
following criteria:
• The trust is established and maintained by a nonprofit association.
• Assets are pooled for investment but accounted for separately.
• The accoun \