What Is a Special Needs Trust?

What Is a Special Needs Trust?

A special needs or supplemental needs trust (SNT) receives and holds assets for the exclusive benefit of a person who is disabled. The key feature of the SNT is that it is not considered a reachable or countable asset of the disabled beneficiary for the purposes of qualifying for means-tested government programs. Specifically, a SNT does not jeopardize its beneficiary’s eligibility to receive public benefits like Supplemental Security Income (SSI), or Medicaid.

At Ely J. Rosenzveig and Associates, we specialize in helping you select the right estate planning vehicle for your family’s needs. Our expertise includes crafting trusts that preserve assets for the optimal fulfillment of your intended purpose.

If your family member lives with a physical or mental disability, we will help you preserve and protect their entitlement to receive public funds within the limits of the law. We will also help provide them meaningful access to the enjoyment of life-enriching experiences afforded by distributions from the SNT that otherwise might jeopardize their continued eligibility for Supplement Security Income (SSI), Medicaid, or other needs-based public benefit programs.

In this post, we present a basic outline of some of the main features of special needs trusts. For other important details relating to tax treatment and testamentary gifts, please consult with one of our experienced estate planning attorneys at the Law Office of Ely J. Rosenzveig and Associates. Contact us today.

How Does a Special Needs Trust Benefit a Disabled Person?

Many people living with disabling physical or mental impairments face daily challenges, including the inability to provide for themselves financially. The federal government’s Supplemental Security Income (SSI) program provides monthly payments to help subsidize the living expenses of low-income, disabled persons with limited financial resources. The Medicaid program provides valuable health insurance coverage to SSI benefits recipients.

Eligibility for these publicly funded programs is based on financial need. In 2021, any SSI recipient, with countable assets valued at over $2,000, or who receives more than $794 income per month, will be disqualified from the SSI benefits program.

So, how can a family member or benefactor contribute financial assets to a disabled loved one without bumping them off their public benefits? Setting up a special needs trust (SNT) will provide funds  administered by a trustee that can be used to serve the needs of the disabled beneficiary without jeopardizing their eligibility for SSI, Medicaid, or other public benefits.

Key Takeaways:

  • Assets in a special needs trust are not controlled or reachable by the beneficiary on their own.
  • The SNT grantor dictates the purposes for which the funds may be used.
  • The beneficiary’s lack of control over SNT assets protects eligibility for SSI, Medicaid, or needs-based benefits.
  • SNT assets are generally beyond the reach of creditors, and winners of lawsuits
  • Trustee can use SNT assets only for the beneficiary’s needs – to enrich their life experience on specified terms, and within certain limits.

Choosing the Right Special Needs Trust

What Is a Special Needs Trust?
Setting up a special needs trust (SNT) will provide funds  administered by a trustee that can be used to serve the needs of the disabled beneficiary without jeopardizing their eligibility for SSI, Medicaid, or other public benefits.

A Third-Party Special Needs Trust is funded by assets belonging to someone other than the beneficiary but are preserved for the exclusive use and enrichment of the disabled beneficiary. The third-party SNT is an irrevocable trust in the control of a trustee whose fiduciary duty is to execute the terms of the trust document for the benefit of the beneficiary. These third-party SNTs are usually established by parents, grandparents, or siblings of the disabled person, but they can be formed and funded by anyone other than the disabled beneficiary themself.

Upon the death of the beneficiary, the third party SNT, except in limited circumstances, is not liable to reimburse the government for the value of any SSI and Medicaid benefits the beneficiary received during their life. Instead, when the beneficiary passes away, any remaining SNT assets can be distributed in accordance with the directions set out in the trust document by the original grantor. Known as a “Pay-Back Clause,” this obligation to repay the government for the disabled person’s public benefits is a requirement of a first-person special needs trust not a third-party special needs trust, as described here.

A First-Person Special Needs Trust differs from the third-person trust because it is funded by the beneficiary’s own assets. Prior to the enactment of the Special Needs Trust Fairness Act in 2016, mentally competent disabled individuals were not permitted to create special needs trusts with their own assets for their own benefit unless a judge authorized it. Since then, a disabled person who wins a large civil lawsuit judgment, or who receives a large inheritance, can create their own special needs trust. With the first-party trust in place, the funds they’re entitled to are paid directly into the SNT, thereby preserving their eligibility to receive assistance from public benefits.

As mentioned in the previous section, the downside of a first-party SNT is the “Pay Back Clause,” the requirement that any of the assets remaining in the trust at the time of the beneficiary’s death must first be used to pay back SSI and Medicaid for the benefits the disabled person received during their life.

A Pooled Special Needs Trust is another form of first party SNT in which assets from an individual’s SNT account are pooled with those of other first party SNT accounts to be invested with the hope of growing the assets for the benefit of all the disabled beneficiaries pooled together. Like the first-party SNT, the pooled SNT also needs to include a “Pay-Back Clause” ensuring the repayment of remaining assets to the government following the termination of the trust.

The pooled SNT is funded with assets belonging to the disabled beneficiary. Parents or other family members are also able to create a third-party pooled SNT with their funds for the benefit of designated beneficiaries.

Drafting with Clarity and Precision is Imperative

The importance of drafting special needs trusts with clear and precise language that complies with all regulatory requirements cannot be overstated. Any failure to abide by IRS requirements or the legal provisions governing trust activities can lead to the defeat of the grantor’s intent, and the compromise of the disabled beneficiary’s entitlement to SSI and Medicaid benefits.

There is no substitute for estate planning legal expertise and experience. Ely J. Rosenzveig and Associates makes your intended asset disposition a reality. For estate planning counsel you can trust, contact us.

Ariel S. Rosenzveig
Ariel Rosenzveig

Ariel S. Rosenzveig received his Juris Doctor from the Benjamin N. Cardozo School of Law in May, 2011, and has been practicing law with the firm since August, 2011. During his summers while in law school, Ariel interned with the United States Commodity Futures Trading Commission in New York and with the Securities & Futures Commission in Hong Kong, China. While in law school, Ariel served on the staff of the Cardozo Public Law, Policy & Ethics Journal, volunteered with the Cardozo Advocates for Battered Women, and participated in the National Institute for Trial Advocacy’s Intensive Trial Advocacy Program. Prior to attending law school, Ariel worked as an arbitrage trader for a small proprietary trading firm on Wall Street. Ariel graduated summa cum laude from Yeshiva University in 2006.

Ariel is licensed to practice law in the states of New York and New Jersey, and is a member of the New York State Bar Association (NYSBA), NYSBA’s Elder Law section, and the National Academy of Elder Law Attorneys (NAELA). In June, 2015, Ariel successfully completed a certificate program in mediation through the Program on Negotiation at Harvard Law School.