Estate Planning for Special Needs Adults

If you want to leave something for a loved one who is disabled or has special needs, it’s essential to plan. Leaving an inheritance outright could make them ineligible for need-based aid and benefits. Instead, creating a Supplemental or Special Needs Trust (SNT) can be essential to safeguarding their future. Estate planning for special needs adults with a trust can effectively ensure your loved one has what they need while keeping essential governmental benefits.

What Is a Third-Party Special Needs Trust?

Estate planning for special needs adults for when you’re no longer here starts with learning how to help rather than harm them. An inheritance received outright could negatively impact a loved one currently receiving government benefits.

To receive need-based government benefits, such as Supplemental Security Income (SSI) or Medicaid, a disabled individual must pass a means test. This test ensures they don’t have adequate money or property to pay for their own care.

An individual with a disability or special needs with too many resources is ineligible for government aid. Or they can face a penalty period to gain eligibility, during which they must spend down money, own little to no property, and bring in little to no income.

Creating a special needs trust (SNT), sometimes called a supplemental needs trust, can help you provide for a disabled or special needs loved one while they keep means-tested benefits. Even if they don’t receive benefits now, an SNT can leave open the option for aid in the future.

As long as the SNT meets specific legal criteria, the existence of the SNT and the amount of money and property inside it will not affect your loved one’s means-tested benefits.

There are two types of SNTs: a first-party SNT (also called a self-settled SNT or d4A trust) and a third-party SNT.

What is a First-Party Special Needs Trust?

Authorized under federal law, a disabled individual (trustmaker) may create a first-party SNT using funds received through inheritance or a legal settlement. An individual who later becomes disabled and wants to qualify for government aid can also create a first-party SNT.

In any type of first-party special needs trust, there is a limiting condition on the beneficiary’s death. The trustmaker (or grantor) must state that, at the disabled beneficiary’s death, the remainder of the trust property, up to the amount paid by the government aid (i.e., Medicaid) on behalf of or to the disabled beneficiary, will revert to the government. In other words, this type of trust pays Medicaid benefits back to the state upon the beneficiary’s death. The state program that handles this is the Medicaid Recovery program.

Once the trust reimburses Medicaid, any remaining amount can go to other beneficiaries named in the trust document or the first-party SNT trust agreement.

There are two types of first-party SNTs, both requiring the trustmaker to have the mental ability to create a trust: individual and pooled.

Individual First-Party SNT

A disabled Individual funds a first-party SNTs with assets that actually belong to them. The disabled individual must use the property in this trust for their sole benefit. The special needs or disabled individual must be under sixty-five and meet the definition of “disabled” when creating the trust.

Pooled First-Party SNT

A disabled individual over the age of sixty-five can create a pooled first-party SNT. The parents, grandparents, or guardians of the disabled individual may also create a pooled trust.

What is a Third-Party Trust?

By contrast, a person who wishes to give money or property to a disabled individual can create a third-party special needs trust. A third-party SNT may be a standalone, separate trust. Or you can also create a third-party SNT through a revocable living trust document.

A disabled individual’s parent (trustmaker) often creates a third-party SNT, making it easier for other people, such as grandparents, family members, or others, to name a disabled beneficiary of an inheritance. They can also gift property or money to the trust for the benefit of the disabled beneficiary.

If you are the parent of a disabled individual, consider adding a third-party special needs trust to your estate plan. In lieu of cash or other direct gifts, family members can give gifts or inheritance assets to the trust, setting the funds aside for your disabled loved one. Any property or money in the third-party SNT is not a countable resource for any means-tested government benefit program.

Difference Between a First-Party and Third-Party Trust

The primary difference between a first-party and third-party SNT is that with a third-party SNT you do not have to name the government as the ultimate beneficiary for when the disabled beneficiary dies.

Rather, the trustmaker remains in control and can name the ultimate beneficiary of any remaining trust property. After the disabled individual’s death, the successor beneficiary receives the trust assets.

So, third-party trusts are an ideal solution to provide for a disabled loved one. And they let you maintain some control over the remaining property and money.

Receiving Money from a Special Needs Trust

The trustee of both first-party and third-party SNTs must limit the payments to the disabled beneficiary. Trust assets can supplement government aid but not replace it.

Depending on the limits of the government program providing benefits, there may be limits to what an individual may spend on personal items. Trustees must follow the rules when giving money to or spending money for the disabled beneficiary.

The trustee must follow both the trust instructions and the rules of the government program providing benefits to the disabled individual. With careful distributions, the trustee can prevent the disabled individual from aid program disqualification. Your estate planning and trusts attorney can help you understand how trusts work to prevent disqualification from benefits.

Our Experienced Trust Attorneys Can Help

At Vail Gardner Law, if you would like to provide for a disabled or special needs individual, we can help. Drawing up a comprehensive estate plan can help you provide for a loved one’s future. A properly drafted and funded Special Needs Trust can ensure that your loved one maintains eligibility for potential government aid while receiving funds to supplement their life where needed.

We are here to answer any questions you may have about setting up a special needs trust so that you can provide for your loved one’s future. Our experienced attorneys can help you create a special needs trust that meets your goals and helps provide for your disabled loved one. Contact us today to set up a time to discuss the future.

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