A special needs trust (SNT) is a trust designed to assist a disabled beneficiary so that the beneficiary can continue to receive government benefits such as Medicaid and Supplemental Security Income (SSI) or other state provided benefits and still receive supplemental benefits from the trust. The SNT trustee covers expenses beyond the “needs tested” benefits, but the benefits in the trust are not paid to the disabled beneficiary directly.
There are two basic kinds of SNTs. A first-party SNT, also referred to as a “self-settled” or “(d)(4)(A) trust,” is funded with assets or income that belong to an individual with a disability and who is the beneficiary of the trust. Typically, the funding comes from a personal injury settlement or inheritance the beneficiary receives directly.
The second type, a third-party SNT, also known as a supplemental needs trust or “(d)(4)(C) trust,” is funded with assets belonging to someone other than the beneficiary.
For the assets of a first-party SNT not to count for Medicaid or SSI purposes, federal law requires that: (1) the beneficiary must be disabled for at least 12 consecutive months; (2) is under the age of 65 when the trust is created and funded; (3) the trust must be irrevocable and provide that Medicaid will be reimbursed upon the beneficiary’s death or upon termination of the trust, whichever occurs first; and, (4) the trust must be administered for the sole benefit of the beneficiary.
The disabled beneficiary cannot use his/her own assets to fund a third-party SNT. Rather, funding usually comes from gifts, inheritances, and proceeds of life insurance policies. If the third-party SNT is structured and operated properly, it is not required to pay back Medicaid upon the trust’s termination. The creator of the trust decides how the remaining trust assets are to be distributed when the disabled beneficiary dies.
SNTs may benefit both the trust creator and the disabled beneficiary. The beneficiary receives needed supplemental financial support without jeopardizing their eligibility for income-restricted programs or services. The trust creator is reassured that the proceeds will go to expenses they stipulate and, in the case of a third-party SNT, the remaining assets can go to other heirs or beneficiaries.
If you've got questions about supplemental needs trusts or special needs trusts and how they work, send us an email at customerservice@zelllaw.com.
(This is for educational purposes only and not to be taken as legal advice.)