A special needs trust and your plan for the future
A special needs trust (SNT) is a critical element of your estate and financial planning. Having a SNT in place will help ensure your child continues to be cared for and live a full life as you age and upon your death.
Remember, the trust itself does not secure your child's future, the resources you direct to fund the trust will do that job.
SNT Quick Reference Guide
What is a special needs trust (SNT)?
- A trust is a legal document that provides directions and rules for assets held on behalf of a beneficiary or beneficiaries. These assets are usually bank accounts or investment accounts with stocks, bonds, and mutual funds, or other property such as real estate.
- A typical trust used in special needs planning is the Special Needs (or the Supplemental Needs) Trust. This is a trust you, as parents, establish that will allow your child with special needs to receive his/her share of your estate.
- Key actions:
- Be sure the trust is properly drafted.
- Be sure the trust will be adequately funded upon the parents' deaths.
- Make sure your financial planning and legal documents are properly coordinated.
- If funded properly, at your death the SNT will provide the basis for your child’s future financial security. It will protect their eligibility for government benefits and will make additional money available to supplement the beneficiary’s (your child’s) needs.
- There are two steps:
- Identify what your child’s anticipated needs will be.
- Assess what steps you can realistically take to provide what is necessary in light of your other financial requirements and goals.
- To read more about Trusts and Estate Planning in general, see the Types of Trusts section below.
Who is involved in setting up a SNT?Trusts create a fiduciary relationship between three parties: the donor, the trustee and the beneficiary.
- Donor/Creator/Grantor/Trustmaker/Settlor - choose the term you find most clear, but this is the person who creates and funds the trust.
- Trustee(s)- the person(s) who will be responsible for managing the special needs trust after your death.
- Beneficiary- the person who is entitled to receive funds from the trust.
- Remainder beneficiary- Upon the death of your child, any remaining assets in the trust will be distributed to whomever you name as the successor or remainder beneficiary.
Why set up a SNT?
- The special needs trust (SNT) allows you to leave an inheritance to your child without disqualifying him or her for government benefits.
You can direct any share of your estate to be distributed to the special needs trust, including your house (although in many cases this is not a recommended planning strategy), savings and investment accounts, life insurance proceeds, and/or retirement plans.
What types of SNTs are there?There are three types of special needs trusts: third-party special needs trusts, first-party special needs trusts, and pooled trusts.
Third-Party Special Needs Trusts
- A third-party special needs trust (SNT) is the most common trust used in special needs planning.
- It is often established by parents, grandparents or other people wishing to gift money or leave an inheritance to the beneficiary (your child) without disqualifying them for government benefits.
- During your child's lifetime, the trust will serve as a source of money to supplement their government benefits and may provide for additional care providers, care managers, special foods or supplements, non-covered medical expenses, therapies and equipment, entertainment, hobbies, trips, and other items to enhance their life.
- There are no Medicaid pay-back provisions in a third party SNT.
- The trustee is responsible to know what items and services they can and cannot provide for the beneficiary. They must not provide any money directly to the beneficiary but may pay directly to the vendor or provider of services. One simple example is haircuts. The trustee may pay directly to the salon but may not give money to the beneficiary to pay for their own haircut, which could potentially disqualify them for certain government benefits.
First-Party Special Needs Trusts
- A first-party special needs trust (SNT), is allowed under OBRA ’93 and known as (d)(4)(A) Trusts, Pay-back Trusts, or more recently, as Self-Settled Trusts.
- This trust document allows any inheritance, legal settlement, or other assets held or received by an individual with disabilities to be deposited to this self-settled trust while allowing the individual to maintain or become eligible for certain government benefits.
- At one time only a parent, grandparent, or court could establish such a trust, but with more recent legislation, the individual may establish their own First-Party SNT.
- The funds may only be used for the sole benefit of the beneficiary. Upon the death of the beneficiary, any remaining assets in the trust would first be subject to pay-back for Medicaid expenses rather than to family members.
- When an individual has both a first-party SNT with a pay-back provision and a third-party SNT where there are successor beneficiaries named in the document, distributions must be made carefully as the rules are a bit different. This is where your choice of trustee or co-trustees and your financial planner or investment manager is critical; they should know the purpose of the trust and the difference between each trust.
- A pooled trust, also known as a (d)(4)(C) trust, is for individuals with disabilities and established and managed by a non-profit organization. Assets are combined and invested together, and funds are spent on beneficiaries in proportion to their share of the total trust amount.
- Pooled trusts are available to individuals over age 65 who receive Medicaid or SSI.
- When the beneficiary dies, there is no Medicaid pay-back provision, however, the non-profit organization will retain a portion of the funds remaining.
- This option is appropriate for the beneficiary who has no other viable trust options. To find a pooled trust in your state, or your child’s state of residence, please visit specialneedsanswers.com (The Academy of Special Needs Planners, 2020) or specialneedsalliance.org (Special Needs Alliance, 2020) to find a directory of pooled trusts by state.
Learn at your own pace.Our Parent's Guide to Special Needs Trusts eBook contains all this information and more.
Funding the trust
Trusts may be funded in various ways and in most circumstances, the SNT is funded at the death of the parent(s) or primary caregiver, rather than during their lifetime.
Presented below are considerations for you and your advisors to review when making your funding decision and actions to consider once the decision is made.
Funding the trust upon the death of a parent
The most common strategy in funding the SNT is to do so upon the death of either one or both parents. There are several reasons why you would fund an SNT only upon the death of the parent, grandparent, and/or caregiver:
- Once an SNT is funded, it becomes irrevocable. The money can be used only to meet the beneficiary’s supplemental needs. This means that the money will be inaccessible for any other personal or family needs.
- A separate tax return must be filed for the trust. This will create additional expenses.
- Taxes on any earnings must be paid by the trust. Income earned in the trust is usually taxed at a higher tax rate than the individual tax rate.
- Overall, funding an SNT while you are alive can reduce flexibility in your plan because the terms of the trust cannot be changed if needed.
- Make provisions in your will that provide the directions to transfer money to the SNT.
- Name the SNT as a beneficiary of your life insurance policies, retirement accounts, and annuities.
- If it is determined that specific assets are to be used to fund the trust, you can register the assets as a Transfer On Death TOD account, naming the SNT as the beneficiary. These assets will pass to the trust without going through probate.
- Purchase life insurance on a parent or grandparent. Naming the SNT as the beneficiary will provide a tax-free death benefit to the trust. Communicate your plans with others who may be leaving any gifts or inheritances to your child. They should name the SNT rather than your child directly so not to compromise any planning that you have done to protect their eligibility for government benefits.
Funding the trust during the donor's lifetime
Although funding the trust may reduce flexibility, here are some of the reasons to consider funding an SNT during the lifetime of the parent, grandparent, and/or caregiver:
- You may have more than enough money to meet your personal needs, so transferring assets to the trust will not jeopardize your personal financial security.
- You may wish to have the comfort of knowing that there will be a certain amount of money available for the beneficiary.
- Money in the trust can provide some protection from creditors.
- If your child directly receives money (i.e., payable to the child’s name) that would otherwise disqualify them for benefits, such as money received through an inheritance and/or a legal settlement, this money might be directed to a first-party SNT with payback provisions.
- Parents who have taxable estates and high net worth and who are implementing strategies to reduce their estate tax liability may wish to make annual or periodic gifts to the SNT to minimize estate taxes. This will result in reducing the estate tax liability because it will remove the appreciation of the asset from the parent’s taxable estate.
- Grandparents or others may also try to reduce their taxable estate by making annual or periodic gifts to your child. As an alternative to gifting to an SNT, grandparents or others may consider gifting to an ABLE account. Remember, a person can only have one ABLE account, but more than one SNT can be created to provide for an individual.
Whatever strategies you plan to use, be sure to discuss them in more detail with your advisors.
- The first step is to establish an account at a financial institution. This requires applying for a separate tax identification number and listing the name of the trust as the applicant. The trustees are required to sign the application.
- Make gifts of liquid assets out of savings or regularly fund the SNT on a periodic basis. It is important to make sure that you stay within the IRS prescribed limits for annual gifts allowed within the provisions of the annual gift tax exclusion ($15,000 per donor per recipient per year in 2021). However, there are reasons for making exceptions to this limit in your personal planning.
- Make gifts of assets that are likely to appreciate over time. Because the assets would appreciate within the trust and not in the donor’s name, they would appreciate out of the donor’s estate, therefore reducing the estate liability at the death of the donor.
- If you do gift investments other than cash, it is important to provide the cost basis of the original purchase price. This will be helpful when or if the assets are sold.
- Own or purchase real estate property in the name of the trust. You need to be mindful of the income tax consequences for both the trust and the donor, as well as the potential increase in trustee fees. When real estate is owned in the name of a trust, it is often more difficult to obtain a mortgage on the property. However, if the property is sold and the proceeds remain in trust, the proceeds will still be a protected asset for Medicaid planning.
- Own or purchase life insurance in the name of the trust. You need to be mindful of the impact on the beneficiary’s eligibility for government benefits with premium contributions.
5 Common Planning Mistakes to Avoid
There is specific language required in a special needs trust and it is highly recommended that you work with a knowledgeable disability law attorney who has experience drafting special needs trusts.
Time often brings about changes in many people's lives. Bs sure to review your legal documents, Letter of Intent and beneficiary designations periodically.
Special Needs Trust Planning Stories
We could not help but worry about who would pay for the things that we pay for and care for if something were to happen to either of us. As part of our estate plan, our special needs attorney recommended we set up an SNT for our daughter Jenna. This way we could leave as much money as we could without jeopardizing her SSI. We decided that we still wanted to split our estate equally among our three children to be fair to all. But we also knew that Jenna would need more than the others, so we purchased life insurance and named her trust as the beneficiary of the policy. This provided extra money when she would need it the most. When she dies, whatever is left could go to our other children and grandchildren. Ideally, the trust would have very little left by then if all the money is used for her to have a very full life.
When my son Emanuel received an inheritance of over $45,000 from my mother-in law, I was at first angry to learn that this would cause him to lose his government benefits that I have tried so hard to get and maintain for him. But having more than $2,000 in his name made him disqualified. This meant that until I could spend all this money, leaving only $2,000, he would lose his services for PCAs. I was basically told that I now had to use his money to pay for any extra time he needed—which was a lot. We tried to think of other ways to spend $45,000 but could not come up with anything that was necessary for him. What we wanted, and what I am sure my mother-in-law wanted, was to have this money available when Emanuel needed it. When I spoke with an attorney, I learned that I could establish a first-party SNT and deposit the inheritance into this trust without losing his government benefits. Because she acted so quickly, we were able to preserve his benefits. I was finally able to be thankful for this incredibly thoughtful gift that my mother-in-law left for my son. Now, our goal is to spend these funds wisely for my son over time and limit what remains upon his death, so Medicaid does not receive his inheritance as a payback.
Upon my mother’s death, I initially felt comforted knowing that my mother had recently met with a disability law attorney to plan her affairs. Because I do not live near my sister with special needs, I had my personal attorney review the legal documents when my mother died. Everything appeared to be in order until I contacted the life insurance company, [which] informed me that my sister and I were equal beneficiaries on my mother’s policy. This meant that the money my mother originally intended to help provide for my sister’s needs actually disqualified her for benefits. If my mother had only coordinated designating the beneficiary of her life insurance policy with her estate plan, this would never have happened. I wish I had known.
Estate Planning and Types of TrustsEffective estate planning involves planning for the disposition of everything you own upon your death or incapacity according to your wishes and in as smooth and tax efficient a manner possible. Basic legal documents utilized in estate planning include:
- a will
- durable power of attorney for property (POA)
- durable power of attorney for health or health care proxy
- a HIPPAA release form
Work with your financial planner, accountant, and estate planning attorney to explore techniques, including charitable giving and tax minimization strategies, to meet your desired goals in the management and transfer of your wealth.
- Although they are subject to change, federal and state estate taxes can play a significant role in determining an appropriate estate plan.
- Utilize the annual gift tax exclusion. You may gift $16,000 (2022 limit) to any individual you choose without any tax filings or consequences. Be aware that a person with a disability who receives government benefits must not have more than $2000 in their name. Consider a gift to that person's SNT or ABLE (529A) account in order to preserve their eligibility.
- A trust where you can make changes and serve as the trustee while you are able to do so.
- Names a successor trustee who can step in when you can no longer manage the trust and also provides direction upon your death for distribution of the assets held in the trust.
- Provides privacy to your estate when you die since it is not a probate asset and does not have to be presented to the courts when the grantor dies.
- A trust containing very specific language and rules that cannot be changed due to the provisions of the trust.
- Common purposes for the use of irrevocable trusts: to protect the beneficiary’s eligibility for public benefits, to minimize estate taxes, or protect the proceeds of life insurance.
- Trusts that are revocable during your lifetime become irrevocable upon your death. This makes trusts different from wills because they extend your wishes and instructions beyond your death.
- A trust created upon your death.
- Often used by younger families who will likely make changes to their estate plan in the future and helps to minimize the expense of creating separate trust documents.
- If most of your assets are in your retirement plans or life insurance policies, they will pass by the ownership or beneficiary designation. In this case, establishing a living trust may not be the most effective plan as there are minimal assets to transfer to the trust ownership.
- If you do have a testamentary trust in your current will, then as with all of your estate planning documents, you should make sure to revisit this at least every five years or at the time of a change in your health, marital, family, or financial situation.
Choosing a trustee
Selecting a trustee or successor trustee for your child’s SNT is a big decision. The trustee may be a family member, a friend, or even a bank or lawyer. The trustee ensures that the money in the trust is spent only on your child with special needs and only on services that you've specified or that are appropriate to your child's needs. Also,
- The trustee also supervises how the money in the trust is invested.
- The person who is caring for your son or daughter (the guardian) cannot spend any money in the trust without the trustee's approval.
- We often recommend that the trustee be a different person than the guardian. This will provide a relationship with checks and balances and make them accountable to one another.
- The Special Needs Answers website provides information about many specific scenarios- check it out!
The trustee of a SNT has significant responsibilities. Most SNTs give the trustee sole discretion to make distributions from the trust funds. There are specific guidelines to be followed in making distributions.
Responsibilities of a trustee:
- reading the trust document.
- collecting the trust property,
- protecting the trust assets.
- properly investing the trust assets.
- maintaining accurate and complete trust records.
- making distributions from the trust on behalf of the beneficiary.
- reporting any adjustments to the trust.
- having a good understanding of trustee laws and government benefit eligibility requirements.
Considerations trustees should keep in mind:
- A trustee is a fiduciary. This legal term means the trustee holds a position of the utmost responsibility. A person who is entrusted with someone else’s assets is held to the highest standard of integrity.
- Managing property for a beneficiary who has disabilities is different than managing funds for yourself. Record keeping must be flawless, and the beneficiary’s money must be zealously guarded. The trustee cannot personally borrow money from the trust, nor can they lend money to friends or family.
- A trustee must learn about his or her responsibilities and when needed, seek advice from a qualified attorney and financial advisor.
Options for Choosing a Trustee:
There are three main options when considering who should be a trustee for your SNT: a personal trustee, a professional trustee or a corporate trustee. You may also choose to name co-trustees who will share the responsibilities.
- Is often a sibling, other family member, or friend whom you trust. You know they will love your child, however, they may be unprepared to assume the many roles and responsibilities with which he or she may have been entrusted.
- It is key is to provide successors to the trustee allowing them to step down if their personal needs change.
- If you do not want to ask them to take on the fiduciary role, but still want them to have a hand in meeting the needs of your child, you can ask them to serve as a family trustee to provide oversight on your child’s behalf.
- Make provisions in your trust that the personal trustee will be compensated in some way in the event this role takes more time than expected.
- Is often an attorney, accountant, or other professional whose practice specializes in SNTs or other trusts.
- Be sure to interview, get to know and check references before hiring. Their philosophies should align with yours.
- Ask about:
- their experience with other beneficiaries who have needs and abilities similar to your child’s,
- their fees,
- and their succession or back-up plan.
- Who do they use for financial management of the trust assets or will they work with your investment advisor?
- Your attorney or financial planner should be able to recommend one or more professional trustees they can also work with.
- Is often a bank, trust company, or other financial institution.
- Often times the fees are higher than a professional trustee’s, but this may be necessary for the amount of money to be funded in your child’s SNT or for other reasons you feel important.
- One benefit of selecting a corporate trustee is the structure and oversight they provide to the trust administration and input in making some potentially difficult decisions. If your child’s needs are complex or they may be problematic to other trustees, or there are no family or personal trustee options in your child’s life, then a corporate trustee is worth considering.
- Be aware that a trust company may be difficult to remove or may be stringent in their decision-making process for distributions.
- Ask how the corporate trustee is compensated. In the event the trustee is paid a percentage of assets in the trust, there may be an incentive not to make distributions from the trust. Since the goal is usually to enrich the beneficiary’s life by using distributions from the trust, the above compensation arrangement may be in conflict with the goal of the trust.
- If your desire is to have the assets in the trust spent down over the course of your child’s lifetime, there may be a conflict of interest that needs to be addressed prior to selecting a corporate trustee.
- If you do decide to name a corporate trustee, be sure to include provisions for someone such as a family member, trusted friend, or advisor to remove and replace the trustee with another trustee.
- While co-trustees lift the fiduciary responsibility and needs of the trust from just one person, but doing so may cause additional complexities.
- In most cases where siblings or family members are co-trustees, both can receive statements from the trust account, make decisions on spending, and be engaged in discussions with the financial advisor and the beneficiary, but only one is writing checks, filing the taxes, and keeping trust records.
- You may name a personal trustee and a professional trustee as co-trustees if they are willing. Often times the professional trustee performs all of the fiduciary roles; they are responsible for all financial matters, bill paying, investment decisions, tax preparation and reporting to any government agencies when or if the trust comes in question. The personal trustee oversees what the professional trustee is doing and provides input on behalf of the family and the beneficiary.
- You can also name a family trustee (or personal trustee) or a trust protector (often the family attorney) who could work with the professional or corporate trustee to keep in mind the family values. The family trustee or trust protector may also have the authority to remove a professional or corporate trustee and replace them with a new professional or corporate trustee if they feel the need to do so.
- Overall, providing flexibility and succession to your trustees is helpful when done properly in the context of the trust. Once the trust is funded, the ability to change trustees is limited by the provisions you have stated in the document which may not provide for any flexibility.
Guidance for Trustees and the Trustee Toolkit
We have some do’s and don’ts to get you started and have packaged them along with a time log and discussion of trustee responsibilities and fees in our Trustee Toolkit.
You can download a copy here.
We can help. Here are some of the ways we work with trustees:
- Guidance for fiduciaries in managing distributions
- Attendance at team meetings with service providers, guardians and trustees
- Focus on preservation of eligibility for government benefits
- Supplemental needs assessment
- Residential assessment
- Investment Management
Additional articles about special needs trusts
Special Needs Trust information adapted from:
The Special Needs Alliance
The Special Needs Planning Guide: How to Prepare for Every Stage of Your Child’s Life by Cynthia R. Haddad and John W. Nadworny
Copyright © 2021 by Paul H. Brookes Publishing Co., Inc. All rights reserved.
Affinia Financial Group conducts business under the Special Needs Financial Planning name. Advisory services offered through Affinia Financial Group, LLC, a registered investment advisor.
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