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Special Needs Trusts: The Basics

Child with Down Syndrome and adult coloring together

What is a Special Needs Trust?

A Special Needs Trust (SNT) is an estate planning tool designed to allow an individual with special needs to receive a monetary inheritance or settlement without disrupting their government benefits. There are two primary types of Special Needs Trusts: first-party SNTs and third-party SNTs.

First-Party SNT vs. Third-Party SNT

A first-party SNT is created when an individual with special needs (the beneficiary) has, or will soon have, funds in their name that exceed the acceptable limit set by the government benefits programs the beneficiary is on. First-party SNTs must be irrevocable, and if there are any funds left in the Trust when the beneficiary passes away or the SNT is terminated, the leftover funds must be paid back to the state to satisfy any applicable Medicaid lien. First-party SNTs may be monitored by the court, and are supervised by state and federal government agencies, meaning that annual accountings are required, the purposes for which the funds in the SNT can be used are limited, and there are additional rules that must be followed when the SNT is created.

For example, the beneficiary must be under the age of 65 when the SNT is created and funded. In most cases, first-party SNTs are used when an individual with special needs receives or will receive a settlement (such as a personal injury settlement) or receives an inheritance directly in their name. In this sense, first-party SNTs are a useful reactive special needs planning tool.

A third-party SNT is created when someone plans to leave an inheritance to an individual with special needs (the beneficiary). The funds never belong directly to the beneficiary, and are instead managed by the Trustee(s) of the SNT, thus protecting any government benefits the beneficiary may receive or be eligible for. Third-party SNTs are often referred to as Supplemental Needs Trusts. Third-party SNTs are not required to be monitored by the court, and any funds remaining after the termination of the Trust or death of the beneficiary are not mandated to be paid back to the state. Instead, the creator(s) of the SNT can designate how they would like any remaining funds to be distributed, whether to other loved ones, charities, organizations, or otherwise. Funding of a third-party SNT can come from life insurance policy proceeds, an inheritance, specific gifts, proceeds of retirement assets, or any other assets owned by an estate or trust. Third-party SNTs are a useful proactive special needs planning tool.

There are many complexities to Special Needs Trusts, so it’s important to consult a legal professional with experience and expertise in special needs planning with any questions you may have about SNTs. If you need to create an SNT, or have one you’d like us to review, please feel free to contact our office at (480) 699-3145 to discuss options.
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