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Special Needs Planning

A special needs trust is a specialized trust that is specifically designed to enable a disabled beneficiary to hold or receive assets without losing need-based public benefits such as SSI or Medicaid. Assets placed into a properly drafted and executed special needs trust are not countable for Medicaid and SSI eligibility, and unlike ABLE accounts there are no limits on the amount of assets may be placed in a special needs trust.

Types of Special Needs Trusts

The type of trust depends on how the trust is funded -- a trust funded with an individual's own funds differs from one that is funded with funds from another person, like a caregiver or a relative. A trust can help protect a beneficiary's assets from creditors and ensure that funds are managed in accordance with the provisions in the trust document for the benefit of the person with special needs.

Third Party Special Needs Trust

A third party special needs trust may be created and funded by friends or relatives of the person receiving benefits but may not be funded with the individual's own funds. Third party special needs trust may be created during the lifetime of the donor or as part of the donor's estate plan.  However, for a special needs trust in favor of a donor's spouse to be effective for its usual purpose (to provide access to assets without disqualifying the beneficiary for government benefits), it can only be created at the death of the grantor spouse (not during a lifetime) and it must be created by the grantor's will (not by a revocable living trust). 

Self-Settled Special Needs Trust

A self-settled special needs trust or “first party” special needs trust can be established with an individual's own funds. For example, if an individual with special needs has received a settlement in a personal injury lawsuit, a self-settled special needs trust may be established for the beneficiary's future care. There are strict rules, however.

First, the grantor-beneficiary must be at or below age 65. 

Second, it must be irrevocable.

Third, the assets can only be used for the benefit of the donor-beneficiary during his or her lifetime but cannot be used for food or shelter or certain other expenses. The rules on eligible use of funds are very complicated and for that reason, professional management is highly recommended.

Fourth, upon the death of the beneficiary, any funds remaining in the trust must be paid back to the government to the extent that the beneficiary received public assistance.

Pooled Trusts

Pooled trusts or "community" trusts are a less common type of special needs planning tool. This type of trust is used when the funds of an individual with special needs are combined with funds from other persons and are managed by a non-profit corporation. Pooled trusts have historically been a good option for individuals who cannot create a first party special needs trust due to the age limitation or cannot find someone who is ready, willing and able to serve as trustee of a first party special needs trust.  However, the utility of pooled trust has decreased lately due to adverse interpretations by some state Medicaid agencies.

Support Trusts

A support trust differs from a special needs trust because it is not intended to prevent disqualification for government benefits. A support trust allows a trustee to make payments for the benefit of the beneficiary for things like

  • food,
  • transportation,
  • education,
  • shelter, and
  • medical care.

For individuals who are receiving government benefits, a support trust may not be the best option.

Special Needs Trust Management

The rules for special needs trusts are complex; the provisions of the trust must comply with state and federal regulations. The trustee for a special needs trust should be familiar with these rules. It is critical that the trust must be managed in such a way that it does not disqualify or delay the beneficiary from receiving benefits. An experienced special needs planning attorney can advise clients and/or family members (who intend to become a trustee for their loved one) about the important responsibility of managing a special needs trust.

Responsibilities of a Special Needs Trust Trustee

A person who wants to be a trustee should understand the responsibilities that come with being a trustee. It is important for a trustee of a special needs trust to

  • understand the complexities and pitfalls of making distributions that could disqualify the beneficiary in whole or in part for government benefits;
  • understand the tax consequences of the particular type of special needs trust;
  • have good communication with the beneficiary;
  • understand the beneficiary's specific needs; and
  • be free of any conflicts of interest.*

*An example of a potential conflict of interest is when the trustee is the same person who receives the remainder of the trust proceeds at the trust's expiration. The problem here would be the trustee's incentive to not allocate funds appropriately to the beneficiary in order to save funds for him or herself.

Corporate Trustees

If it would be in the best interests of the trust beneficiary, another option is to hire a corporate trustee through a bank or other financial institution, like a brokerage firm.

A corporate trustee will manage a special needs trust in exchange for a fee. All funds in a special needs trust must be spent for the well-being and best interests of the beneficiary regardless of who serves as a trustee. A corporate trustee may be a good option for some families because corporate trustees are generally familiar with the financial and legal requirements of managing a special needs trust.

Experienced Special Needs Planning Attorney

It is important to begin planning for the future for a loved one with special needs as soon as possible since failure to plan can potentially disqualify a person with special needs from receiving government benefits.

If you have additional questions about the importance and benefits of a special needs trust or need assistance planning one, contact attorney Nina Whitehurst at Cumberland Legacy Law, located in Crossville, Tennessee. You can use our online form to schedule a consultation or call us at (931) 250-8585.


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