If your loved one has special needs or development disabilities, you may want to consider establishing a special needs trust. Also known as a supplemental needs trust, this type of trust is a legal tool used to help disabled people keep more of their income or assets without losing public benefits.
Purpose of Special Needs Trusts
This type of trust was initially created to help parents with disabled children provide for them as they grew up without making them ineligible for public benefit programs, like Social Security and Medicaid. The intent of the trust is to supplement any government benefits that they may receive or to shield excess income for Medicaid purposes.
The Medicaid program requires that participants spend down their assets in order to reach a certain level of need before qualifying for benefits. A special needs trust can be used so that a disabled Medicaid beneficiary can keep the benefit of almost all of their income, instead of using it to pay for care. That income can also be used to qualify a disabled person for the Medicare Savings Program.
If a disabled person under the age of 65 receives a lump sum, from retroactive Social Security or a personal injury settlement, a special needs trust can protect that money and keep that person eligible for government benefits. By transferring the lump sum into a special needs trust the person can remain eligible for all of their benefits and use the money in the trust to supplement their regular income for years to come.
Types of Special Needs Trusts
New York law recognizes three kinds of special needs trusts, but each type of special needs trust comes with its own set of rules, requirements, and registration. The three types of special needs trusts are a first party, third party, and pooled trust.
First Party Special Needs Trust
A first party special needs trust is funded with assets owned by the trust beneficiary. Also known as a "self-settled trust" or "(d)(4)(A) trust," this type of trust can be established to protect current or future income from, for example, an inheritance or personal injury settlement that would bring the disabled person above the limits for government benefits.
The law requires that the trust must be for the benefit of the individual with disabilities, and it must be established by a parent, grandparent, legal guardian, or the court. It must be irrevocable, and the trust agreement must also include a Medicaid payback provision. This requires the state Medicaid program to be reimbursed upon the death of the beneficiary.
Third Party Special Needs Trust
A third party special needs trust is funded by parents, relatives, or friends of the disabled beneficiary. This type of trust is preferred by parents or other friends and relatives who want to leave an inheritance to a loved one with disabilities. Not only does this type of trust shelter an intended inheritance, it can also be used during the parents' lifetimes for ongoing expenses that are not covered by government benefits.
A significant attraction of the third party SNT is that, unlike a first party SNT, when the beneficiary dies, there is no Medicaid payback requirement. The person who created the third party SNT (often a parent) chooses and has complete control over selection of the trust remainder beneficiaries.
Pooled Special Needs Trust
A pooled trust is also funded with assets that are owned by the disabled person, like a first party trust. Pooled trusts are established and managed by nonprofit organizations. The assets in the trust are pooled together for investment purposes, but the organization manages a sub-account for the beneficiary. In a pooled trust, the trust beneficiary can establish the pooled trust sub-account on their own.