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Understanding the Benefits of a Special Needs Trust:

Special needs trusts (SNTs) play a crucial role in the lives of loved ones with disabilities.  The primary benefit of a special needs trust over a typical testamentary trust or living trust is that it won’t disqualify the beneficiary from certain government benefits, such as Medicaid or Supplemental Security Income (SSI).  However, navigating the legal intricacies of setting up a special needs trust can be complex, especially given the unique trust laws and regulations of each state.

Medicaid and SSI are needs-based government benefits that have specific income and asset requirements that change each year.  If an individual exceeds the income or asset thresholds, they can be disqualified from receiving the assistance they need.  When someone has a loved one that is receiving assistance from these government programs or expects to apply for these benefits in the future, it is crucial to setup an SNT which shields the assets from counting toward the beneficiary’s personal income and assets.

Special Considerations:

Before you setup a special needs trust, it’s important to consider your loved one and their wants and needs.  Thoughtful consideration should be given to the following:

  • What is their current income and expenses?
  • What financial support will my loved one need?
  • Will they be able to enjoy the same quality of life that they have now?
  • Who will serve as the trustee?
  • How often will they need disbursements?
  • How to ensure that Medicaid and SSI benefits will not be lost?

Types of Special Needs Trusts:

There are two types of special needs trusts, the third-party trust and the first-party trust.  Third-party trusts are the most common, but there are certain instances where first-party trusts are used as well.

Third-Party Trust:

A third-party special needs trust is established by a family member or friend who wants to help the special needs person.  The trust can be created inter vivos as a standalone trust or mortis causa as part of one’s estate plan

One may choose to create a standalone trust if they want to give their disabled loved one a gift during the grantor’s lifetime.  Conversely, one may choose to create a special needs trust as part of their last will and testament if they wish to bequest the disabled loved one part of their estate at death.  This would also apply to a life insurance policy naming the trust as the beneficiary or a retirement account also naming the trust as the death beneficiary.

A third-party trust does not require a payback provision, meaning any remaining assets may go to a secondary beneficiary after the primary beneficiary’s death.  However, the limitation of a third-party trust is that the funds and income of the trust should not be made directly available to the beneficiary, meaning the beneficiary cannot compel payments from the trust.  Rather, the trust should have tailored provisions regarding for what purposes the trustee is permitted to disburse funds.

First-Party Trust:

A first-party special needs trust is established with the assets already belonging to the disabled individual.  This is often funded from an inheritance or legal settlement.  One may choose to create this trust if they are receiving Medicaid or SSI and unexpectedly receive an inheritance.  The trust can be created before the estate is probated.  Also, one may choose to create this trust if they are permanently disabled in an accident for which they may receive a settlement or monetary judgment.  If they expect to apply for government benefits, they will need to create a first-party special needs trust to keep the settlement proceeds from counting towards their assets.

These trusts are subject to a payback provision to the state Medicaid agency for the cost of care upon the beneficiary’s death.  Only after Medicaid is paid back can the beneficiary’s heirs receive any remaining assets in the trust.

Funding the Special Needs Trust:

The most common way special needs trusts are funded is through the grantor’s will, estate plan, life insurance policy, or employee benefit.  In the case of a third-party trust, this typically takes place at the death of the grantor or settlor, but it can be funded by a gift prior to death.   Once created, the account is available to receive funds from any other source as well, such as other family members.  It is helpful to notify family members and friends about the beneficiary’s trust account so that they know to direct any gifts or bequests to the special needs trust rather than directly to the disabled individual.

As noted above, a first-party trust is commonly funded with settlement proceeds or an inheritance that is left without the creation of a third-party trust.

How Funds in the Trust can be Used:

A well-drafted special needs trust will specify the allowed expenses and the circumstances under which the trust assets can be used.  It is crucial for trustees and beneficiaries to comprehend these limitations to ensure that the trust continues to support the beneficiary without disrupting their government benefits.

Government benefits almost always fall short of covering expenses entirely.  Since a Medicaid or SSI recipient cannot earn much income without losing their benefits, a special needs trust is the perfect way to supplement their needs.  A special needs trust is commonly used to pay for medical expenses, home care, transportation, education, recreation, and housing costs.  Disbursements from the trust should not replace or interfere with the government benefits.  Instead, disbursements should supplement the benefits to enhance the quality of life for the special needs beneficiary.

Louisiana Estate Planning Attorneys:

We are a Gretna law firm that has served the New Orleans area since 1980.  Our estate planning lawyers are well versed at creating special needs trusts and can help you create a trust that will ensure your loved one is provided for while also protecting their needs-based government benefits.  We take pride in offering a personal and trusted experience.  Call us today for a free consultation and find out why so many of our clients come back to us.

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