There are generally three types of Special Needs Trusts: self-settled special needs trusts, third party special needs trusts and pooled trusts. All special needs trusts are designed to provide supplemental money to a person who is receiving government benefits in a way that will not cause the special needs person to lose their benefits.
A self-settled special needs trust is a trust established by the special needs person for the benefit of themself using the assets of the special needs person. A third party special needs trust is a trust established by a person other than special needs person and not using the assets of the special needs person.
Normally, there is an asset limitation to what a person can own before he or she can qualify for SSI or Medicaid. The reason why the beneficiary of a special needs trust can qualify for SSI and Medicaid is because those trusts are limited in what they can pay for and they are specifically allowed by statute.
Special needs trust administration can be very complex as the trust can generally not pay for food, shelter, electricity, gas or water and it may not pay for anything that can be converted into food, shelter, electricity, gas or water. Additionally, cash should almost never be distributed to a beneficiary from the trust and there are special rules about a trust owning a home.
The prime difference between the terms of a self-settled special needs trust and a third party special needs trust is that when the beneficiary of a self-settled special needs trusts dies (or the trust terminates), the balance in the trust must pay off any Medicaid liens that have been built up. If there is money left in the trust after that, the balance can be paid to the beneficiary’s relatives. With a third party special needs trust, no payback provision is necessary.
For people who are interested in setting up a special needs trust, but do not have a lot of money, the pooled trust is a valuable option to consider. A pooled trust is usually run by a non-profit and pools money of many people into one trust. At the death of the beneficiary, whatever money is left in the trust usually goes to the non-profit institution. The biggest problem with a pooled trust is that they are usually more conservative and limited in how they can be administered.
All special needs trusts are considered Asset Protection Trusts. Most third party special needs trusts are also set up as modified Irrevocable Life Insurance Trusts as they provide a tax efficient way to pass wealth on to the special needs children.
Kevin Pollock is the special needs trust lawyer in charge of the firm’s Estate and Trust Planning Department. Attorney Kevin Pollock has focused on Wills, Trusts & Estates since 2000 when he received his master’s degree in taxation.
For more information on Special Needs Planning, please visit my blog: Kevin A. Pollock BLAWG