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What is a Special Needs Trust?

Mar 6, 2020 | Blog

A special needs trust is set up for an individual with special needs to supplement any benefits they may receive from government programs. A properly drafted special needs trust will allow the beneficiary to receive government benefits while still receiving funds from the trust. There are three main types of special needs trusts, but first it is important to understand how a typical trust works.

A trust is really a relationship between three parties — a donor, who supplies the funds for the trust; a trustee, who agrees to hold and administer the funds according to the donor’s wishes; and a beneficiary or beneficiaries who receive the benefit of the funds. Often, but not always, the donor’s wishes are spelled out in a document that gives the trustee instructions about how he or she should use the trust assets. Trusts have been used for estate planning for a long time, and are highly useful tools for ensuring that a donor’s property is administered as he or she sees fit. One of the reasons trusts are so popular is that they usually survive the death of the donor, providing a low-cost way to manage the donor’s assets for others when the donor is gone.

A special needs trust is a trust tailored to a person with special needs that is designed to manage assets for that person’s benefit while not compromising access to important government benefits. There are three main types of special needs trusts: the first-party trust, the third-party trust, and the pooled trust. All three name the person with special needs as the beneficiary. A first-party special needs trust holds assets that belong to the person with special needs, such as an inheritance or an accident settlement. A third-party special needs trust holds funds belonging to other people who want to help the person with special needs. A pooled trust holds funds from many different beneficiaries with special needs.

The reason there are several different types of trusts has to do with regulations regarding Supplemental Security Income (SSI). SSI is a government program that assists individuals with low income who have special needs. In order to qualify for SSI, an applicant or beneficiary can have only $2,000 in his or her own name. If the person has more than $2,000 in his or her own name, (typically because of excess savings, an inheritance, or an accident settlement), the government allows him or her to qualify for SSI so long as he or she places his assets into a first-party special needs trust. While the beneficiary is living, the funds in the trust are used for his or her benefit, and when he or she dies, any assets remaining in the trust are used to reimburse the government for the cost of his or her medical care. These trusts are especially useful for beneficiaries who are receiving SSI and come into large amounts of money, because the trust allows the beneficiary to retain his or her benefits while still being able to use his or her own funds when necessary.

The third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold any kind of asset imaginable belonging to the family member or other individual, including a house, stocks and bonds, and other types of investments. The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect an SSI beneficiary’s access to benefits and the funds can be used to pay for the beneficiary’s supplemental needs beyond those covered by government benefits. But a third-party special needs trust does not contain the “payback” provision found in first-party trusts. This means that when the beneficiary with special needs dies, any funds remaining in his or her trust can pass to other family members, or to charity, without having to be used to reimburse the government.

A pooled trust is an alternative to the first-party special needs trust. Essentially, a charity sets up these trusts that allow beneficiaries to pool their resources for investment purposes, while still maintaining separate accounts for each beneficiary’s needs. When the beneficiary dies, the funds remaining in his or her account reimburse the government for his or her care, but a portion also goes towards the non-profit organization responsible for managing the trust.

Anyone can establish a special needs trust and, if the trust is properly drafted to account for tax planning, in certain situations gifts into the trust could very well reduce the size of the donor’s taxable estate. Of course, every person with special needs is different, which means that every special needs trust is going to be different as well.

Some materials, in whole or in part provided by the Academy of Special Needs Planners, an independent 3rd-party. The information contained here does not purport to be a complete description of the topics referred to in this material. As of the date published the information is considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete due to ever changing legal constructs and state specific differences. Please note, changes in laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Saybrook Wealth Group, we are not licensed to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.