A Third-Party Special Needs Trust (also referred to as a “Supplemental Needs Trust”) allows parents or other relatives of a special needs beneficiary to dedicate assets to the beneficiary by gift or inheritance without affecting his or her eligibility to receive government benefits and without any need for reimbursement of benefits that are provided by government agencies. Although Supplemental Security Income (SSI) and Medicaid programs require that applicants have limited income and resources in order to be eligible for assistance, assets which are owned by a Special Needs Trust are not counted in determining the child’s eligibility to receive benefits. Rather, the Special Needs Trust allows the beneficiary to enjoy the use of the assets in the Trust while preserving his or her qualification to receive government benefits.
In order to protect the assets which are allocated to a special needs beneficiary and preserve his or her eligibility for government assistance, the terms of a Third-Party Special Needs Trust must direct the trustee to use the trust assets to supplement, but not replace, any government benefits which are available to the beneficiary. Specifically, the trustee is directed to use trust assets for the beneficiary’s “special needs”, which can include obtaining goods and services to maintain or improve his or her comfort, welfare and care, including luxuries beyond basic needs. Thus, the beneficiary will not have any access to or control over the trust assets during his or her life. In addition, because a Third-Party Special Needs Trust does not require that Medicaid/SSI be reimbursed for any benefits that were provided to the beneficiary, the trust may provide for the assets to pass to the beneficiary’s children (or to such other beneficiaries as the grantor designates) at the beneficiary’s death. In this manner, the Third-Party Special Needs Trust can incorporate estate planning for other family members, such as the beneficiary’s children, grandchildren or siblings.
The following are some important factors that should be considered before creating a Special Needs Trust:
Determine the purpose of the Trust. Is the trust being created to receive lifetime gifts from parents or other family members, or will the trust receive assets from the estate of the person creating the trust? (i.e., usually the beneficiary’s parent or parents). If the Trust is to receive lifetime gifts from parents and/or other family members, the person establishing the trust (called the “grantor”) would create an inter vivos trust, which trust could be either revocable or irrevocable. If an irrevocable trust is used, the assets in the trust will not be subject to estate tax at the grantor’s death. On the other hand, if a revocable trust is used, the assets will be included in the grantor’s taxable estate and thus subject to estate tax at his or her death. Both irrevocable and revocable trusts can also receive bequests to the beneficiary under the grantor’s Will. If the Trust is only to receive assets at a person’s death, then the trust could be created under the individual’s Will, in which event the assets will be subject to estate tax at his or her death.
Select who the trustee of the trust will be. Most often, a parent of the beneficiary will serve as the initial trustee. The role of trustee is a long term function and involves investing the assets and having sensitivity to the needs of the beneficiary for purposes of making distributions and should be someone with an understanding of how to properly distribute trust assets without affecting the beneficiary’s eligibility for benefits. These qualifications should be considered when selecting successor trustees as well.
Assets to be contributed to the Trust. Whether the trust is being created now to receive gifts of assets during the grantor’s life, or whether the trust will be created under an individual’s Will, it is important to consider and anticipate the amount of assets that will be necessary for the beneficiary’s care during his or her life, taking into account any gifts that might be made for the beneficiary’s benefit from other relatives.
If applicable, select individuals to serve as guardians after the death of both parents. Note that the appointment of a guardian for a minor child may be done under the individual’s Will. However, if the special needs beneficiary is no longer a minor, a guardian would need to be appointed through a legal proceeding. In that instance, the Will may include language expressing the individual’s hope and desire that the court appoint specific persons, as the court will consider such language as evidence of the testator’s intentions.
Prepare written instructions for the trustee, guardians and family members regarding how to care for the special needs beneficiary. This may be done through a letter of intent, which provides detailed instructions regarding the day to-day care and activities of the special needs individual. There is no required form for a letter of intent, and the letter should be as detailed as is necessary to ensure that guardians and family members have sufficient information to properly care for the beneficiary.
Determine any possible changes in circumstances that need to be addressed. If there is a concern that the beneficiary may no longer require government assistance at some point in the future as a result of improved functional ability, the trust can be drafted so that the trustee may make distributions from the trust for any reason in such instance. This will allow for flexibility in case the beneficiary’s needs should change in the future.
This list is by no means exhaustive and those who have a special needs child, grandchild or other relative should consult with an attorney before embarking on a special needs plan to carefully review available options that can be tailored to fit the individual’s circumstances. It is also important to note that a Third-Party Special Needs Trust should not be the sole component of an estate plan but should comprise part of a larger overall plan, which is best explored through the advice of an estate planning attorney.