Darnell and Laura have a 23-year-old daughter with special needs. Their daughter, Louisa, works as an aid at a local Goodwill store. She is proud of her job and earnings, but Darnell and Laura know Louisa will not have the capability or the financial means to care for herself when they are no longer here.
Louisa moved to a group home last year. She lives with four other women and a couple who help in the group home and maintain it. Louisa receives Supplemental Security Income, Medicaid, based on her earnings. Her parents and Louisa’s Job and Disabilities counselor helped her apply for the benefits. She proved that she did not have adequate money or property to pay for medical care, in-home care, medical equipment, therapy, or the room and board expenses for living in the group home.
Darnell and Laura have their own business and have saved money for Louisa’s future care. If they give Louisa the money outright, she will lose her government aid and may have a penalty period during which she will need to spend down her money until she is below the government threshold and can receive aid again.
Darnell and Laura are meeting with their estate attorney to decide whether they should create a special needs trust (SNT), sometimes called a supplemental needs trust, to help Louisa with her expenses while ensuring she maintains her government aid eligibility. They are working with their estate attorney to learn how the SNT can be structured to meet the legal criteria to provide Louisa with money and property if she needs it without negating her government assistance eligibility.
Their estate attorney explains two types of SNTs, a first-party SNT, which is also called a self-settled SNT or D4A trust, and a third-party SNT.
A First-Party Special Needs Trust
With a first-party SNT, Louisa will create the trust using funds she inherits from her parents. She could also do so with funds from a legal settlement. If Louisa had sustained an injury that led to her disability, she could have created a trust with her settlement money. She might still have been eligible for government aid that is based on income or asset limitation.
There are two types of first-party SNTs, individual and pooled. Both types require the person establishing the trust to have the mental ability to create it, as the trust is funded with money and property that belongs to the individual with the disability.
Individual first-party special needs trust
The property in the trust must be used for the sole benefit of the person with the disability, and they can be the only beneficiary. The trust maker or person establishing and funding the trust must be under the age of 65 and meet the definition of disabled when creating the trust.
Pooled first-party special needs trust
A pooled first-party special needs trust can be created by someone with a disability over 65. It can also be created by parents, grandparents, or guardians of the person with a disability. In this type of trust, once the person with the disability dies, the rest of the trust property and money, up to the amount paid to the individual in government aid over their lifetime, must be paid back to the government. This policy allows the government to recover any paid assistance to or on behalf of the person with a disability. Any trust assets leftover can be paid to other beneficiaries as named in the first-party SNT trust agreement.
A first-party special needs trust will not work well for Darnell and Laura, as Louisa does not have the capability to manage the trust herself or understand the trust requirements.
Third-party special needs trust
A third-party SNT allows a third party such as Louisa’s parents to give her money or property and will enable her to still qualify for government aid. Louisa’s parents can create a third-party SNT through a revocable living trust or a will. Keep in mind that a third-party SNT, like all assets in a Last Will and Testament, will be subject to the time and expense of the probate process. It’s why, almost always, a revocable living trust is a preferred estate planning approach to a will.
A third-party SNT can be a standalone, separate trust. Darnell and Laura can also let other family members know about the trust. Relatives and friends can use the trust to give a person cash or other gifts as an inheritance without harming their ability to qualify for government assistance. The money and property in the trust will not be counted when determining whether Louisa qualifies for any means-tested government benefit program. Besides, the government will not be a beneficiary when the primary beneficiary, Louisa, dies. The trust makers, Darnell and Laura, will name the ultimate beneficiaries of any remaining trust property after Louisa has died.
A third-party SNT is ideal for Darnell and Laura. They can establish the trust to benefit Louisa, name a successor trustee to manage the trust if they outlive Louisa, and determine how the money will be used throughout their lifetime and ultimately who will be beneficiaries.
Receiving the money from a special needs trust
The trust property in either a first-party or a third-party trust should only be used to supplement, not replace, the money Louisa is receiving as government aid. Therefore, the payments made by the trustee to or on behalf of Louisa are limited. The government program providing her benefits may limit how much can be spent on personal items. Trustees must follow both the trust instructions and the laws and rules of the government program providing the benefits. Otherwise, there is the risk that Louisa will be dropped from the aid program.
If you, like Darnell and Laura, would like to provide for an individual with a disability or who has special needs, at your death, this plan would be incorporated into your estate plan. The type of special needs trust and how it is structured will determine whether your loved one will benefit from the funds you save for their care while also maintaining eligibility for potential government aid. We can help you consider the options and draft a trust that meets your requirements.