What is a Special Needs Trust?
Third-Party Special Needs Trusts
Funding The Third-Party Special Needs Trust
First-Party Special Needs Trusts
Choosing the Trustee for Your Special Needs Trust
When To Use Pooled Special Needs Trusts

What is a Special Needs Trust?

First, a short explanation of what trusts are and how they work: A trust is a form of ownership of property, whether real estate or investments, where one person – the trustee – manages such property for the benefit of someone else – the beneficiary. The trustee must follow the instructions laid out in the trust agreement as to how to spend the trust funds on the beneficiary’s behalf – whether and when to distribute the trust income and principal.
A special needs trust is an essential tool to protect a disabled individual's financial future. Also known as "a supplemental needs trust," this t ype of trust preserves eligibility for federal and state benefits by keeping assets out of the disabled person's name. Special Needs Trusts fall generally into two main categories: Third-Party SNTs that one person creates and funds for the benefit of someone else, and First-Party SNTs (also called d4a trusts) that are created for the person with special needs using that person’s own money.This article provides an overview of the different types of Special Needs Trusts. If you are a parent of a disabled child, please also see our detailed article on Estate Planning for Parents of Disabled Children.

A special needs trust is typically designed to restrict payment for food and shelter, but can typically pay for the following special needs:

dental care
plastic surgery
psychological support services
recreation
transportation
telephone equipment and service
television equipment and service
stereo sound system
computer equipment
internet access
electric wheelchairs
mechanical beds
companions for travel, driving, and cultural experiences
reading material
books on tape
hair and nail care
stamps and writing supplies
plastic or cosmetic surgery or other non-necessary medical procedures
private rehabilitative training
periodic outings, cultural experiences and vacations
medical/dental expenses
annual checkups
transportation and vehicle purchase
training programs
education
insurance
rehabilitation
home health aide.
differentials in cost between publicly-provided housing and private housing
differentials in cost between housing and shelter for shared and private rooms
special nursing care and similar care which assistance programs may not otherwise provide
housing if absolutely necessary (though this may cause an approximate 1/3 reduction in the amount of SSI benefits paid)

Third-Party Special Needs Trusts

A trust that is created and funded by someone for the benefit of a person with special needs is often called a "third party SNT." This type of trust can be created while you are alive by using a revocable or irrevocable living trust, or can be created upon your death through your living trust or through your Last Will and Testament. If you create and fund a third-party SNT during your lifetime, you can place assets into the SNT while you are alive and/or upon your death. This type of third-party SNT can also be used to receive any inheritance that may come from a grandparent or other family member, provided the other family member properly names the SNT that you created. Because the SNT will own the assets, the beneficiary will not become ineligible for government benefits. On the contrary, the SNT allows the beneficiary to receive vital public benefits, while the funds in the SNT can be used for the special needs beneficiary to improve care and quality of life until his or her own death, at which time any assets left in trust can pass to whoever you name in the trust document.

Our firm will work with you to determine the exact provisions to include in your SNT. We will consider information about you and your disabled beneficiary and how you want the trust funds used. We will base our recommendation on your beneficiary's age, what benefits your beneficiary is receiving or is likely to receive in the future, the eligibility requirements for benefits, and the kind and amount of assets you plan to place in the trust.

Funding The Third-Party Special Needs Trust

A number of issues arise with respect to the question of how much to put into a third-party SNT. First, how much will your child with special needs require over her life? Second, should you leave the same portion of your estate to all of your children, no matter their need? Third, how will you assure that there’s enough money?

The first question is a difficult one. It depends on what assumptions you make about your child’s needs and the availability of other resources to fulfill those needs. A financial planner or life care planner with experience in this area can help make projections to assist with this determination. It’s generally better to err on the side of more money rather than less. You can’t be certain current programs will continue. And you have to factor in paying for services, such as case management, that you provide free-of-charge today. If these assumptions mean that your child with special needs will require a large percentage of your estate, how will your other children feel if they receive less than their pro rata share? After all, your estate may already be smaller than it would be otherwise due to the time and money spent providing for the child with special needs. And your other children may have received less of your attention growing up than they would have otherwise had they not had a child with special needs. One solution to the question of fairness and to the challenge of assuring that there are enough funds is life insurance. You could divide your estate equally among your children, but supplement the amount going to the special needs trust with life insurance. The younger you are when you start, the more affordable the premiums will be. If you are married, the premiums can often be lower if you purchase a policy that pays out only when the second parent dies.

First-Party Special Needs Trusts

The above discussion involves estate planning by parents for money they plan to leave their child with special needs. However, a third-party special needs trust cannot hold funds belonging to the disabled individual himself. Unexpected events may trigger money being paid directly to a person with special needs. This may happen, for example, through an inheritance from a family member, life insurance proceeds, or a personal injury settlement. If a person is about to receive money or property in an amount that will cause him or her lose benefits, a First-Party SNT – often called a “(d)(4)(A)” trust, so-named after the U.S. Code section that authorizes this type of trust – is a planning option that can help set aside some or all of the money for supplemental needs and still allow the person to stay on public benefits without any period of disqualification. If a person has already received money or property in an amount that has caused him or her lose benefits, the First-Party SNT can still be used as a tool to set aside some or all of the money for supplemental needs and allow the person to re-obtain public benefits.

A (d)(4)(A) trust must be created while the disabled individual is under age 65 and must be established by his or her parent, grandparent, legal guardian, or by a court. A (d)(4)(A) trust also must provide that at the beneficiary's death any remaining trust funds will first be used to reimburse the state for Medicaid paid on the beneficiary's behalf. Because of this payback provision, this type of trust is sometimes called a "payback trust." The Virginia Office of the Attorney General must approve all payback trusts to make sure that they meet the standards in the law. After the state is paid back, any assets left in the trust can pass to the people chosen by the grantor and named in the trust instrument.

Choosing the Trustee for Your Special Needs Trust

Choosing a trustee is one of the most difficult parts of planning for a person with special needs. The trustee of a special needs trust must be able to fulfill all of the normal functions of a trustee – accounting, investments, tax returns and distributions – and also be able to meet the needs of the special beneficiary. The latter often means having an understanding of the various public benefits programs, having sensitivity to the needs of the beneficiary, and having knowledge of special services that may be available. There are a number of possible solutions, including professional trustees such as banks, trust companies, and law firms who work with special needs trust. Often parents choose to appoint co-trustees – for example a trust company or law firm as a professional trustee along with a healthy child as a family trustee. Working together, the co-trustees can provide the necessary experience to meet the needs of the child with special needs. Unfortunately, in many cases such a combination is not available. Some professional trustees require a minimum amount of funds in the trust. In other situations, there is no appropriate family member to appoint as a co-trustee.

Where the size of the trust is insufficient to justify hiring a professional trustee, two other solutions are possible. The first option is simply to have a family member trustee who would hire accountants, attorneys and investment advisors to help with administering the trust. Where no appropriate family member is available to serve as co-trustee, the parent may direct the professional trustee to consult with specific individuals who know and can care for the child with special needs. These could be family members who are not appropriate trustees, but who can serve in an advisory role. Or they may be social workers or care managers or others who have both personal and professional knowledge of the beneficiary. This role may be formalized in the trust document as a “Care Committee” or “Advisory Committee.” The second option is to use a pooled trust.

When To Use Pooled Special Needs Trusts

A pooled SNT is a special type of SNT that is created by a nonprofit organization. The nonprofit organization may act as the trustee of the pooled SNT, or it may select the trustee. Individuals have separate accounts in the pooled SNT, but all the money is pooled together and invested by the trustee. Individual beneficiaries get the services of a professional trustee and more investment options because there is more money overall. A third-party pooled trust provides a way to benefit from a special needs trust without having to create one yourself.

Just as with single-beneficiary trusts discussed above, there are both “third-party” pooled SNTs (which you can use to give money during life, or leave money upon death, for a special needs beneficiary) and “first-party” pooled SNTs – also called “(d)(4)(C)” trusts – used to protect money that belongs to the special needs beneficiary. Unlike the individual payback trust – i.e., the (d)(4)(A) discussed above, which may be created only for those under age 65 – pooled SNTs may be for beneficiaries of any age and may be created by the beneficiary himself. In addition, at the beneficiary's death the state does not have to be repaid for Medicaid expenses so long as the funds are retained in the trust for the benefit of other disabled beneficiaries. Although a pooled trust is an option for a disabled individual over age 65 who is receiving Medicaid or SSI, those over age 65 who make transfers to this type of trust may incur a transfer penalty.