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Types of Special Needs Trusts

Special Needs Trusts—sometimes known as a Supplemental Needs Trust—are legal documents designed to benefit those with a disability. While a Special Needs Trust is often a “stand alone” document, it could also be part of a person’s will or trust. Special Needs Trusts have been used for more than two decades, after being granted legal status by Congress in 1993. A person who has a mental or physical disability or those with a chronic illness, are allowed, under a Special Needs Trust, to have (held in trust for their benefit) unlimited assets. These assets are then not considered “countable” against qualification for specific government benefits. Subsidized housing, Medicaid, Supplemental Security Income and vocational rehab are just some of the benefits a person named in a Special Needs Trust could still remain eligible for. The idea behind the Special Needs Trust is to provide supplemental care above what government programs would provide.

Special Needs Trust Must Be Set Up as Irrevocable Trusts

Each Special Needs Trust becomes its own entity with its own EIN, issued by the IRS. The Special Needs Trust is not registered under the beneficiary’s or the grantor’s Social Security number. Special Needs Trusts must be set up as irrevocable trusts. The Special Needs Trust will include directions related to necessary amendments as well as provisions associated with termination of the Trust or dissolution when required.  Those who want to ensure their special needs relative receives supplemental and extra care after their death will set up a properly drafted Special Needs Trust.

Sliding Scales for Special Needs Trusts

These Trusts are set up on a sliding scale, meaning that in the unlikely event the government provides a full 100 percent of the disabled person’s needs, the Trust will provide 0 percent. If no governmental benefits are available to the disabled person, the Trust will provide 100 percent. Most beneficiaries will fall somewhere in between on this scale. As an example, if a disabled beneficiary should fall into what is known as the Medicare “doughnut hole,” the Trust will cover that shortfall.  While Medicaid does not allow Special Needs Trusts to be used for housing or food for the disabled person, there are “loopholes” involved in Medicaid rules. As an example, there are no restrictions associated with purchasing an accessible home for the disabled person, or on making an existing home accessible to the disabled person.

Why Create a Special Needs Trust?

Those who have a large amount of financial resources, may wonder why they should consider a Special Needs Trust for a disabled love one, when they are well able to provide for the special needs person long after their death. Many times, a family trust simply doesn’t address the specific needs of the disabled beneficiary or his or her future. Any money placed in a Special Needs Trust is considered a non-countable asset, allowing the beneficiary to qualify for programs and benefits available; these monies are not subject to creditors or seizure, meaning if the beneficiary were ever to be sued, money placed in the Special Needs Trust would not be subject to judgments.

It is important to remember that transferring assets for any purpose other than a Special Needs Trust is considered a transfer for the purpose of a benefit qualification and could be subject to a 36-60 month “look back” periods. This means the disabled beneficiary might not be eligible to receive benefits for up to five years following the date of the transfer. A Special Needs Trust can be established any time prior to the beneficiary’s 65th birthday. There are essentially three types of Special Needs Trust:

  • A first-party trust is used when the beneficiary’s own assets will be used to create the trust, say from an inheritance or court settlement;
  • A third-party trust is used when assets are provided by someone other than the beneficiary, such as a parent or grandparent, and
  • A pooled trust is established and administered by an organization, usually a nonprofit.

Special Needs Trusts require very specific legal wording, and, as such, should be prepared by a qualified Virginia estate attorney who can answer your questions and help you prepare a document which will most fully benefit your loved one.