Types of Special Needs Trusts (sometimes called supplemental needs trusts)
There are two different types of special needs trusts (SNTs): self-settled and third party.
1. A self-settled special needs trust (sometimes referred to as supplemental needs trusts)
This is typically a trust that an individual creates and funds with his or her own resources. In the case of a self-settled special needs trust, however, with the exception of a pooled trust (described below), the disabled individual cannot create the trust. Federal law requires that it be created by a parent, grandparent, guardian or court.
The resources of an individual with disabilities are transferred to the trust. This is commonly referred to as funding the trust. These trusts have a payback provision must be included in the trust document. This means that any state that has rendered Medicaid assistance will be paid back to the extent of such assistance, out of the remaining funds in the trust. This occurs upon the death of the individual with disabilities.
Third-party special needs trusts are not required to have such a payback provision. Self-settled special needs trusts with the exception of pooled trusts must be established and funded before the disabled individual attains the age of 65.
A pooled trust is also a self-settled special needs trusts. These trusts are typically used when the disabled individual is over the age of 65 or is under 65 and does not have a living parent or grandparent to create the trust. Of course, even if there is no living parent or grandparent, the court or the individual's guardian may create a special needs trust for individuals of any age.
Pooled trusts are managed by a non-profit organization. Currently, there is one pooled trust in Connecticut, PLAN of Connecticut. Other states have similar pooled trusts as well. In the case of the pooled trust, the trustee opens a sub-account for each individual with disabilities and the assets are pooled for investment purposes.
Because pooled trusts are self-settled trusts, the disabled individual's assets are subject to the payback provisions referred to above. While federal law permits the disabled beneficiary to elect to have the trust assets remaining at his or her death to be used for the benefit of other disabled individuals who are participating in the pooled trust, or provide that the remaining trust assets be paid back to any state that has rendered medical assistance (payback provisions).
2. Third party special needs trusts are trusts that are both created by a third party other than the individual with disabilities (like a parent or grandparent) and are funded with assets of a third party. Thus, the assets of the individual with disabilities are not transferred to a third-party special needs trust. These trusts may be inter vivos or testamentary, meaning that they can be effective during the third party's lifetime or after his or her death.
Unlike self-settled SNTs, third-party SNTs have the advantage of not requiring a payback provision to any state which has rendered medical assistance upon the death of the individual with disabilities. Thus, other family members may inherit trust assets remaining after the disabled individual's death.
Planning for both the resources of the disabled individual and to ensure that he or she can maintain or become eligible for SSI or Medicaid requires care. Further, estate planning for clients who have disabled children or other disabled family members who they want to benefit either during their lives or after death, requires competent legal counsel. The interplay of both federal and state law makes this area of practice even more challenging.
SNT trustees responsibilities
The trustee must be keenly aware of the unique issues pertaining to distributions of trust principal and income when disabled individuals are beneficiaries. Keeping government benefits intact and preserving limited resources for such individuals are both paramount in clients' minds. Non-professional trustees will need competent counsel advice as to distribution planning for the person with disabilities as well as other trust administration issues.
Life care plans
In the case of a disabled child, a life care plan may be prepared to better assess the needs of that child. This is particularly so in the case if the child receives a personal injury settlement. A life care plan can be of utmost importance to the trustee who is working to invest assets to ensure that they will outlast the child and to maintain a quality of life for that child that adequately meets his or her medical and personal needs.
Trust investments are an important part of special needs trust planning. If parents have a child with disabilities but have limited financial resources, they may want to consider funding such a trust with life insurance to ensure that there are sufficient resources to adequately meet the child's needs. With regard to other trust assets, trustees have to be sufficiently prepared to invest assets to meet state law requirements that pertain to trust investments as well as the needs of the disabled beneficiary.