Special Needs Trusts


If you have a loved one with special needs, you have to plan your estate carefully since leaving money or property directly to that person could jeopardize his or her government benefits, such as Supplemental Security Income (SSI), Social Security Disability (SSD) or Medicaid. The way around this problem is creating a special needs trust for the person you love who is medically or psychiatrically disabled. It is very important to have such a trust created with the help of a skilled estate planning attorney. 


The Procedure for Creating a Special Needs Trust 

Although your disabled loved one is permitted to retain his or her residence and motor vehicle without threatening government benefits, any extra money he or she possesses over a small amount ($2,000 per individual) will put those benefits in jeopardy. With the assistance of your attorney, you will choose a trustee to manage the trust fund who will have full control over the resources you have bequeathed. Since your loved one will not have direct access to these gifted funds, he or she will retain full government benefits. 

A special needs trust must be irrevocable in order to be effective. Also, the trust ends either at the time of the beneficiary’s death or when the trust funds have been exhausted. Obviously, when setting up your special needs trust, you should have complete faith that your trustee is reliable and will act with the proper mix of generosity and discretion. 

Types of Special Needs Trusts 

There are several types of special needs trust, each established to serve a distinct purpose. 

Third-Party Trusts 

This is the type of trust most typically used for the benefit of people with special needs. The trustee who has been chosen is allowed to use trust funds to provide personal services, luxury items, transportation, pet supplies and vacations for the beneficiary, but the disabled party never has direct access to trust funds. 

Pooled Trusts 

Pooled trusts are useful in two particular situations: [1] if you don’t have a good candidate to act as trustee or [2] if you are leaving a relatively small sum and don’t want to set up an individual special needs trust. Pooled trusts are administered by nonprofit organizations that receive and invest funds from a number of families. While each beneficiary retains a separate account, the trustee appointed by the nonprofit spends money on behalf of each beneficiary. 

While pooled trusts are available in many areas of the country, they vary in terms of the ways they operate and the fees they charge. If you are considering becoming involved in a pooled trust, also known as a community trust, it is best to confer with your attorney to make sure the one you choose is well-run and has a good track record. 

First Party Special Needs Trust or D(4)(A) Trust 

This trust is set up with money that belongs to a person with special needs.  This may happen if the person with the special needs was accidentally named a beneficiary outright.  Proceeds from a settlement resulting from a lawsuit can go into this type of trust.  Usually, this trust is still set up by a parent, grandparent, guardian, or conservator.  In order to set up a First Party Special Needs Trust, a parent, grandparent, guardian, or conservator will go to court to have the trust set up. The court will authorize the trust to be set up and then the parent, grandparent, guardian or conservator will sign it. 

The reason to set up this type of trust is to keep the special needs beneficiary on government benefits.  There are strict income and asset requirements in place in order to receive state and federal benefits.  If the special needs beneficiary is even one dollar over the income or asset limit, they cannot receive benefits until he/she spends it down or fixes the income limits. 

The main difference with this type of trust is that after the death of the person with special needs, the state and federal government are paid back for the benefits provided to that person during the lifetime of the trust. After the money is paid back, any remaining money can be given to additional beneficiaries designated by the drafter of the trust. 

When is a First Party Special Needs Trust used? 

Inheritance – if the person with special needs receives his/her inheritance outright instead of in a special needs trust, he/she can put the money in a special needs trust rather than lose government benefits until the inheritance money is spent down. 

Settlement From Lawsuit – A First Party Special Needs Trust can allow someone to get a large personal injury award or medical malpractice award without losing his/her benefits. 

Divorce Settlement – A First Party Special Needs Trust can allow someone to receive money from a divorce settlement without losing his/her federal and state benefits. 

Both a First Party and a Third-Party Special Needs Trust allow assets to be set aside to supplement expenses not covered by government benefits.  However, there are differences between these two types of trust. 

Some characteristics of a First Party SNT are the following: 

  • The trust for a minor must be established by a parent, grandparent, guardian or the court. 
  • The trust must be “irrevocable,” that means it cannot be changed. 
  • The beneficiary’s assets are used to fund the trust. 
  • The beneficiary must be under age 65 at the time the trust is established. 
  • At the beneficiary’s death, the state Medicaid agency must be reimbursed. 
  • Third Party Special Needs Trust 

This trust is created by the donor with their money and is usually part of a larger estate plan. Typically, donors are parents and grandparents.  Usually, these trusts are funded when the parents or grandparents die.  Assets that can go into the trust are life insurance proceeds, bank accounts, real property, and mutual fund accounts.  Retirement accounts can go in, although the process is very complicated and typically not recommended unless there are no other assets available.  There is no limit on the size of the Special Needs Trust. 

The beneficiary of this trust is the person with special needs.  As long as the money is left in a Special Needs Trust the person with special needs can continue to receive state and federal benefits.  The assets in the Special Needs Trust will not be counted again him or her. 

The ABLE Act changes the asset limits for anyone who is diagnosed with a disability before age 26.  However, the ABLE Act does not negate the need for a special needs trust. 

One advantage of a third party special needs trust is that it can be revocable until certain triggering events.  The advantages are that the trust can be changed during the lifetime of the Grantors.  Keeping the trust revocable allows flexibility in response to certain events.  These events include changing trustee, changing the beneficiaries who inherit the money after the special needs beneficiary and changing the trust due to changes in the law.  Typical Grantors usually are parents and grandparents. 

The drawback of the third party special needs trust is it cannot hold the money of the person with special needs.  It is really important that the money is not comingled.  Often special needs beneficiaries work.  Parents are reluctant to take money from their special needs children. Even if they charge rent they save the money, therefore, special needs beneficiaries frequently have their own money.  The issue is what can be done with that money.  If there is less than $100,000.00 and the child was diagnosed with the disability before age 26 then the ABLE Act applies. If there is more than $100,000 or the child did not get his/her diagnosis before age 26 then a first party special needs trust needs to be looked at. 

Some of the different main benefits of a third-party special needs trust are: 

  • There is no age limit for the beneficiary. 
  • There is no limit to the amount left to the beneficiary. 
  • The funds can be used for anything the supplement needs of the beneficiary. 
  • When the special needs beneficiary dies other beneficiaries can be designated to receive any remaining assets without paying back any government agency. 

What to do When you Special Needs Child Reaches 18 

A big concern in the special needs community is what to do when your child reaches 18 in terms of managing a special needs trust.  Despite the special needs you as the parent no longer have the right to make medical and financial decisions for your child. 

If the child is capable he or she can sign a Power of Attorney and Health Care Power of Attorney naming his or her parents as Agents. 

If the child is not capable of executing his or her own documents then the parent(s) should seek a Guardian and Conservatorship over the child.  You may not need the conservatorship unless the child has income other than government benefits. 

A guardian is a person appointed by a judge after a formal court proceeding who is charged with making all the personal i.e. health issues, non-financial decisions for an incapacitated individual. 

A conservator is a person appointed by a judge after a formal court proceeding who is charged with taking control of and managing the estate and finances for an incapacitated individual. 

How Do I Get One? 

In order to get a guardianship and conservatorship, a trip to court is necessary.  A petition is filed asking the court to grant the necessary powers.  What is in the petition is dependent on the situation. 

After the petition is filed the clerk’s office appoints a guardian ad litem.  That is an attorney appointed by the court to protect the rights of the person for whom guardianship or/and conservatorship is sought. The guardian ad litem does this by meeting with the person prior to the formal hearing, explaining the process, assessing the situation, and then making a recommendation to the judge. A guardian ad litem is needed even if the incapacitated person is incapable of communicating or understanding what is being said. Only an attorney certified by the courts can serve as a guardian ad litem. 

First-party trusts come into play when the special needs individual receives money through any of the following: 

  • Personal injury or other lawsuit awards 
  • Retirement funds 
  • Divorce settlement 
  • Life insurance policy 
  • Inheritance 

Knowing that his or her government benefits are threatened by this development, the disabled person, hopefully with sound legal advice, puts the newly acquired money into a first-party trust. This protects government benefits while allowing for certain otherwise unattainable pleasure purchases for the beneficiary. 

It should be noted that the first-party trust for a minor must be: 

  • Irrevocable 
  • Created by a parent, guardian or the court if the beneficiary is a minor 
  • Created for a beneficiary under the age of 65

Also, Medicaid will have to be reimbursed upon the beneficiary’s death or upon the termination of a first-party trust, whichever occurs first.