Choosing the Right Special Needs Trust

A special needs trust, which is also called a supplemental needs trust, can provide financial support for an individual with special needs without interfering with their ability to qualify for government benefits. Choosing the right special needs trust is extremely important. There are two primary types, both of which are subject to specific rules and requirements.

The purpose of a special needs trust is to supplement a person’s governmental benefits, not supplant them. A special needs trust cannot provide the beneficiary with cash, food, or shelter, without reducing benefits according to federal Social Security law. However, there are many allowable expenditures that can be specified in a special needs trust, such as those listed in the permissible distributions list. On account of all the specific requirements that apply, this type of trust should only be established with assistance from a knowledgeable estate planning lawyer.

Third-Party

A third-party special needs trust may be created by anyone other than the individual with special needs, who is the beneficiary of the trust. This type is generally used by a parent, grandparent, or other relative wishing to provide financial assistance to an individual with special needs as part of their estate plan. The trust can be effective on the donor’s death or during their lifetime, depending on how the trust is written.

A person of any age can be the beneficiary of a third-party special needs trust. A significant benefit of a third-party trust is that Medicaid cannot claim the assets for reimbursement when the beneficiary passes away, since the trust assets are not owned by the beneficiary.

A third-party special needs trust must comply with specific legal requirements to avoid jeopardizing the government benefits of the beneficiary. If you wish to provide financial support for a loved one with special needs, it’s essential to discuss your wishes with an experienced estate planning lawyer before you take any steps to provide that support.

First-Party

While a third-party special needs trust is funded with assets owned by a person other than the individual with special needs, a first-party special needs trust is funded with assets belonging to that individual. There are restrictions on who may establish a first-party special needs trust.

A court may create a first-party special needs trust when an individual with special needs receives money, such as when damages awarded in a civil lawsuit or the person inherits property through an estate by a means other than through a qualified special needs trust. Prior to December 13, 2016, only a court or the beneficiary’s parent, grandparent, or legal guardian could establish a first-party trust. Since that date, a change in federal law permits a legally competent individual with special needs to set up their own first-party special needs trust.

First-party special needs trusts have other restrictions under the applicable federal law, including that the beneficiary of a first-party special needs trust must be under the age of 65. One important characteristic of a first-party trust is that when the beneficiary of a first-party special needs trust passes away, Medicaid may claim assets remaining in the trust for reimbursement of payments made for the beneficiary’s benefit during their lifetime.

Choosing the Right Special Needs Trust

Choosing the right type of special needs trust for an individual depends on the circumstances. In most situations where a parent, grandparent, or another person wishes to use their own funds to benefit a loved one with special needs, a third-party special needs trust is the appropriate choice.

However, if the individual with special needs receives money directly, such as through a lawsuit or estate, generally a first-party trust is used. A first-party trust also may be appropriate if an individual who owns assets develops special needs. In that situation, the individual may become eligible for government benefits by transferring their assets into this type of trust.

Whatever the circumstances of your loved one with special needs, you should ask for assistance from an experienced estate planning lawyer before you attempt to set up a special needs trust of any kind. These trusts are subject to specific laws and legal rules, including taxation requirements[1]. Establishing this type of trust without help from a lawyer can create a myriad of problems for you and for your loved one. Those issues may include loss of government benefits for the individual with special needs, which could have a devastating effect.

Talk With Our Experienced Michigan Estate Planning Attorneys

At the law firm of Barron, Rosenberg, Mayoras & Mayoras, P.C., we provide a full range of services relating to estate planning, including special needs trusts. We’ve been serving clients in Oakland County and beyond for more than 40 years. Our clients count on our commitment, experience, and credentials when they turn to us for their legal needs.