The purpose of a Special Needs Trust (SNT) is to ensure the SNT beneficiary with special needs or disabilities will have the financial resources of the SNT to provide for the extra care and lifestyle they need, while also maintaining eligibility for valuable government benefits. In general, the assets held in a SNT will not cause a beneficiary to lose important means-tested public benefits, such as Supplemental Security Income (SSI) or Medicaid.

There are several different types of SNTs, namely First Party SNTs (funded with the assets of the SNT beneficiary) or Third-Party SNTs (funded with the assets of someone other than the SNT beneficiary). Further, a SNT may be an individual trust  with a single beneficiary or a pooled trust with many beneficiaries.

Do I Need a First Party Special Needs Trust?

A First-Party SNT is funded with the assets of the disabled SNT beneficiary. These are also commonly referred to as a “Medicaid Payback Trust” or “Self-Settled Special Needs Trust”. To be valid under federal law, an individual first-party SNT established under 42 U.S.C. p(d)(4)(a) must be funded with the assets of the SNT beneficiary who is under age 65, established by the disabled beneficiary, their parent, grandparent, legal Guardian, or the Court, and contain a Medicaid payback provision upon the SNT beneficiary’s death. Note, the Medicaid payback will be the value of Medicaid services rendered or the value of SNT, whichever lesser.

There are also pooled first-party SNTs established under 42 U.S.C. 1396p(d)(4)(c) which holds funds contributed by any number of disabled individuals. Pooled trusts are typically operated by non-profit organizations, and each beneficiary will only be entitled to distributions for his or her contributive share. At the beneficiary’s death, there will also typically be a Medicaid payback requirement and/or charitable beneficiary.

First-party SNTs are beneficial when a disabled individual under the age of 65 who receives means-tested public benefits (e.g., SSI or Medicaid) comes into newfound wealth (e.g., outright inheritance or lawsuit settlement proceeds), but still needs the public benefits. Typically, this individual would lose these important public benefits for the reason their countable assets would then exceed the countable SSI asset limit of $2,000.00. However, an individual or pooled first-party SNT can be used to hold and disburse the disabled individual’s assets for their supplemental needs.

Do I Need a Third-Party Special Needs Trust?

Third-Party SNT (aka a Supplemental Care Trust) are funded with the assets of another individual and not those of the SNT beneficiary.  For example, parents or grandparents may wish to establish a Third-Party SNT in their estate plan for the benefit of the disabled loved one to leave a legacy that provides financial stability and enhances lifestyle, avoids loss of public benefits, and appoints a trusted individual or entity to manage the inherited monies.   

Key features of a third-party Special Needs Trust include but are not limited to the following:

• May be established and funded either during the parent’s lifetime (intervivos) or upon the parent’s death (testamentary).
• Trustor (parent) designates a responsible individual or entity to serve as Trustee.
• May be established for a beneficiary of any age.
• May be funded from multiple third-party sources (e.g., parents, grandparents, and siblings).
• Beneficiary (individuals with disability or special needs) will maintain eligibility for government benefits.
• Distributions of income and/or principal will be made in the sole discretion of the Trustee to provide for beneficiary’s supplemental needs not otherwise provided for by government benefits -very flexible, distributions will typically be made directly to the providers of goods and services rather than to the beneficiary directly and may include distributions to an ABLE account.
  • Note: distributions for “food or shelter” will result in a 1/3 reduction of SSI benefits.
• Creditor Protection.
• Enhances the quality of life for the beneficiary, preserving important public benefits, thereby stretching out the trust assets over a longer period of time.
• No pay-back to Medicaid at beneficiary’s death; Trustor designates contingent beneficiaries (e.g., relatives and/or charities).

In some instances, using a Pooled Third-Party Special Needs Trust is appropriate. Pooled trusts are managed by non-profit organizations and provide professional trust administration services.

Quick Reference Guide of First Party SNT versus Third Party SNT

First Party SNT (Self-Settled)	Third Party SNT
Funded with disabled person’s assets	Funded with assets of the third party (such as parent or spouse)
Must be established before disabled person reaches age 65	Established for beneficiary of any age
Must be established by a parent, grandparent, legal guardian, or a court, or the disabled beneficiary	Established by anyone except the disabled beneficiary
Restrictive use* (see statute, A.R.S. §36-2934.01)	Distributions allowed per terms of Trust*
SSA/AHCCCS approval/supervision required	No SSA/AHCCCS supervision required
At death of beneficiary- Medicaid Payback requirements to the State (AHCCCS/ALTCS)	At death of beneficiary- No payback requirements
More expensive/complex	Less expensive/complex

 

*Payment from trust for food or shelter of the disabled trust beneficiary will result in a 1/3 reduction of SSI benefit. Cash paid to the disabled trust beneficiary will count as “income” for SSI and AHCCCS/ALTCS benefits and may reduce or eliminate benefits.

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If you have a loved one with special needs, you should always seek advice of an experienced special needs planning attorney. Special needs planning attorneys are familiar with the most common choices faced by parents of children with disabilities and can offer advice and suggestions on how to plan for that child’s care and financial well-being. These matters are complicated and emotionally-driven, and advice and advocacy of an experienced special needs planning attorney can make a significant long-lasting positive impact for you and your special needs loved one.

While special needs planning certainly involves estate planning, traditional estate planning attorneys do not have the experience or acumen needed to best guide families, draft, or give advice on the administration of SNTs.

In Arizona? Call our office at 480-922-1010 or email info@bivenslaw.com to schedule your appointment and see just how we can help you and your family prepare for your future or that of your special loved one. We are here to help!