The Basics of Special Needs Trusts

Timothy Doolittle

Special Needs Trusts (“SNTs”) are an essential tool both when a person with disabilities has assets to protect and when that person’s parents are considering their estate plan. Whether the person with the disability has funds, receives funds from a personal injury settlement, or receives funds and property as a gift, the money must be managed carefully. SNTs (or Supplemental Needs Trusts as they can be referred to) are the best tool to use for asset protection for those with disabilities. 

    The primary goal of an SNT is to preserve a disabled person’s access to needs based public benefits when receiving a lump sum or inheritance. These benefits might otherwise be lost when the individual acquires resources over a given threshold. A person who is disabled may be receiving Supplemental Security Income (“SSI”) on a monthly basis and may have Medicaid coverage to pay for the costs of healthcare. Medicaid and SSI are means-tested and impose limits on resources, so an influx of money from an injury settlement or inheritance could result in a loss of benefits access. 

    An SNT makes it possible to avoid this loss of benefits. When properly drafted in accordance with the law and when properly structured and maintained, SNTs allow money to be used for the benefit of someone who is disabled without jeopardizing benefits access. The assets held in the trust are not counted as resources for Medicaid or SSI calculations but can be used to supplement and enrich the quality of life of the person who is disabled, beyond what governmental benefits provide for. When SNTs are created, it is important to know what specific type of trust must be used. There are two primary kinds of SNTs: first-party trusts and third-party trusts. The unique situation of each person will dictate which type of trust will need to be created. 

    If the money or property being put into the trust comes from the person who is disabled, the trust is a first-party trust. This situation can occur if the individual receives a windfall inheritance, receives a personal injury settlement, or if they simply have built up assets based on gifts from family members. A third-party trust can hold assets that are deposited in the trust directly by any third-party source, like a grandparent, parent, aunt, uncle, neighbor, etc. 

    A first-party special needs trust can be established only by the disabled individual, parent, grandparent, guardian or court. They also can only be established for someone under the age of 65. In some situations, courts would monitor these trusts. The main drawback of a first party SNT occurs when the individual with a disability dies. At that point, the SNT must contain terms that names the state providing Medicaid benefits to the individual as the primary beneficiary of the SNT’s assets. This is known as the “Pay-Back” provision, to allow the state to pursue reimbursement for the costs of care expended during the individual’s life. 

    A third-party SNT can be created by anyone who wants to leave money to someone who is disabled. Third-party SNTs can be funded up to any amount, with any type of asset. The trust can be used for virtually any purposes to benefit the person with special needs, except for that the person’s own money cannot be held in the trust. Often times, parents of a child with disabilities will set up a third-party trust as part of their estate plan, to ensure any inheritance meant for the child will not affect their public benefits. 

    Upon the death of the disabled beneficiary of the third-party special needs trust, the money and property can transfer to any other relatives or beneficiaries that the trust creator chooses. Because the money and assets in the trust never belonged to the person who was disabled, the state has no ability to require a pay-back provision. 

    Special Needs Trusts can provide very important protections for someone with disabilities. If you are in a situation that calls for a Special Needs Trust, reaching out to a qualified attorney well versed in the area is a must. 

Timothy Doolittle primarily focuses his practice on estate planning, as well as asset preservation for individuals. Mr. Doolittle is a magna cum laude graduate of the State University of New York at Buffalo, Honors College. Mr. Doolittle is admitted to practice in New York State and is a member of the New York State Bar Association. Contact Mr. Doolittle by emailing TDoolittle@WladisLawFirm.com.