Special Features of Special Needs Trusts

Parents wish to provide for their child with special needs after the parent passes away. However, many parents fear that the inheritance left to their child may disqualify the child from crucial government assistance programs. In order to combat this issue, Congress passed legislation in the 1990’s that allowed special needs children to inherit from their parents without that inheritance affecting their qualification for government programs. This legislation created the Special Needs Trust (SNT).

A SNT is similar to an ordinary trust, but its purpose is to provide for a special needs child without disqualifying them from government assistance programs. The child’s parents, grandparents, or legal guardians are the only individuals who can establish a SNT trust.

There are various requirements that must be met when creating a SNT. First, the SNT must be an irrevocable trust. Next, the trustee must be given complete control over the distribution of trust assets. The beneficiary cannot demand distributions from the trust. Additionally, the SNT beneficiary cannot have the power to revoke or amend the SNT. If the beneficiary had that power, the trust assets would be considered to be “available resources” to the beneficiary and could affect qualification for government assistance. Finally, the trustee cannot give cash directly to the beneficiary, as this would be could cause an immediate reduction in government benefits. Three are three different types of SNT’s: First Party Trust, Third Party Trust, and Pooled Trust.

First Party Trust

First Party Trusts are funded with the beneficiary’s assets. This type of SNT trust can be used when a special needs child receives a legal settlement, an inheritance, or child support payments from a parent. One negative aspect of the First Party Trust is that it must have a provision that requires payback for government monies expended on the beneficiary.

Many special needs children qualify to receive government assistance from Supplemental Security Income (SSI), which is a program that assists low income individuals with special needs. In order to qualify for SSI, the individual must have less than $2,000 in his or her name. If the individual has more than $2,000, such as through a recent inheritance, the government allows the individual to put his or her assets in a First Party Trust.

Third Party Trust

Third Party Trusts are funded by assets owned by the parents or relatives of the beneficiary, rather than being funded by the beneficiary’s own assets. This type of SNT is most often used for estate planning purposes by allowing family and friends to leave inheritances to special needs children. One major benefit of utilizing a Third Party Trust is that it does not require a government payment provision. Therefore, any assets left in the trust when the beneficiary dies can go to family or friends, rather than the government. Additionally, these trust assets can be used during the parents’ lifetime to cover expenses.

Pooled Trust

A Pooled Trust, like the First Party Trust, is funded by the beneficiary’s assets. However, unlike other SNT’s, a Pooled Trust is created and administered by a non-profit organization. The assets in this trust are pooled for the purpose of investment, but the non-profit will maintain a sub-account for the beneficiary. This is a good option for special needs individuals who no longer have parents, grandparents, or legal guardians, but wish to establish a trust. The beneficiary can establish the sub-account, while the non-profit established the Pooled Trust. When the beneficiary of a Pooled Trust dies, a portion of the remaining assets in his or her sub-account is used to reimburse the government for government assistance that was provided. A small portion of the remaining assets is given to the non-profit that maintains the Pooled Trust.

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