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In preparation for a loved one’s long-term well-being, special needs trusts (SNTs) are an invaluable planning tool. A special needs trust can provide fiduciary management and oversight for a loved one unable to manage property or funds due to physical or cognitive limitations. This avoids any financial worry about a lack of judgment or susceptibility to financial manipulation.
Creating an SNT begins with identifying what type of trust best suits the family situation, a suitable trustee, and how to fund the trust. SNTs are not just for the wealthy. One of the simplest ways to fund an SNT is with life insurance policies. It helps maintain quality of life for a child with special needs after their parents pass.
Special Needs Trust Types
There are several types of special needs trusts, but two main categories are first and third-party.
· First-party Special Needs Trust
This trust type receives funding from the assets belonging to the person with a disability. Assets generally come as an inheritance or a settlement award. First-party SNTs are also known as “self-settled” or “payback” trusts because the remaining funds must first repay the government for public assistance benefits upon the beneficiary’s death.
· Third-party Special Needs Trust
This trust type receives funding from assets not belonging to the person with special needs. A parent or grandparent might create an SNT and fund it with their assets, such as a life insurance policy or retirement account. Third-party trusts are not subject to the payback requirement and have greater flexibility in asset distribution.
Other trust types include:
· Pooled Special Needs Trust
This first-party trust pools assets with other beneficiaries and is managed by a nonprofit organization to create a larger aggregate of funds, creating greater investment opportunities. A pooled SNT can help reduce administrative costs as well.
· Testamentary Special Needs Trust
This can be a first or a third-party SNT created in a will that only takes effect after the person who created the will passes away.
· Medicare Set-Aside Trust (MSA)
This trust protects a person’s government benefits eligibility, such as Medicaid or Supplemental Security Income (SSI), when they receive a judgment or settlement in a personal injury case.
The specific type of SNT for your family’s situation will depend on various factors, including the source and amount of assets that can fund the trust and family goals and objectives. A special needs planning attorney can help determine which trust type works for your unique situation and needs.
How a Special Needs Planning Attorney can Help
A special needs planning attorney’s role is critical in creating and administrating an SNT, tailoring it to meet your family’s needs and goals. They assess your goals and inquire about your family’s financial situation, your loved one’s disabilities, and their future care needs. They also help identify the most capable and trustworthy person to become a trustee.
Once the trust type is determined, the special needs attorney can draft the document outlining the SNT’s specific terms, including provisions for funding the trust, rules for asset distribution, and who serves as trustee and successor or backup trustee. In some cases, the attorney may coordinate with other professionals, such as a financial planner or social worker, to ensure the SNT is a comprehensive plan and maintains their eligibility for government-funded benefits.
Once the structure of the special needs trust is complete, the special needs attorney can assist with funding the trust, which may involve transferring assets from your estate or coordinating with family members or third parties. The attorney may also provide ongoing advice and support, ensuring the trust is properly administered and remains compliant with applicable laws and regulations. They can also guide successor trustees who take over the role of administering the SNT.
Special Needs Trust Myths and Misconceptions
Several myths and misconceptions about special needs trusts can prevent families from taking advantage of this valuable planning tool. They include the following:
- Special needs trusts are only for families with high net worth –SNTs can benefit families of all income levels by funding them with life insurance policies, retirement accounts, and even small inheritances.
- A special needs trust will cause my loved one to lose their government benefits – When properly structured, a special needs trust can help your loved one maintain their eligibility for government benefits like Medicaid and SSI. It supplements government benefits by providing additional resources for your loved one’s care and well-being.
- There is no way to change the terms of the trust once created – Although SNTs are designed to be a long-term planning tool, they can be amended or terminated if circumstances change and assets are no longer needed.
- Their siblings will take care of them – Relying on siblings to step up and help typically has disastrous consequences. Setting up an SNT can avoid the reliance on siblings who may be unable or unwilling to provide care.
- It’s too soon – Planning for your family should be done early to allow time for discussion with family members and professionals and envision the best scenario.
- Creating an SNT is too complicated and expensive – While there are costs associated with creating and administering a trust, the benefits far outweigh the costs. A special needs planning attorney can provide the best options, like a pooled trust, to meet your family’s needs and goals.
- Special needs trusts are only for children with special needs – Special needs trusts can benefit individuals of all ages with various medical conditions or disabilities. They may be referred to as supplemental needs trusts to distinguish the difference. They can also provide long-term care for a spouse or other family member with special needs.
Special needs planning attorneys are familiar with the legal and financial issues that affect individuals with disabilities and their families. We invite you to contact our offices in Midway, Erie, and Franklin PA. to learn about options to help you care for your loved ones without sacrificing your career.