What are the benefits of a Special Needs Trust?
What are the benefits of a Special Needs Trust? A Special Needs Trust (SNT) is a device or documents that have a purpose to separate assets from a certain individual who’s the beneficiary.
Here are a few of the questions that will be covered in this article!
- Why were special needs trusts invented?
- What is a special needs trust?
- What is a third party special needs trust?
- What is a first party special needs trust?
- How do spouses create special needs trust for each other?
Why were special needs trusts invented in the first place?
A special needs trust was invented so that people would not lose the entitlement to their government benefits.
If you’re getting government benefits such as entitlement programs like disability, social security, medicare or medi-cal you’re only allowed to have certain assets. If you have too many assets you would not qualify for that program.
For example, let’s take an 8 year old developmentally disabled child who is on public assistance because of not enough assets. They would qualify for public benefits. Let’s say the child receives a large inheritance and let’s say they’re on medi-cal. When they receive a lot of assets they’re kicked out of the public benefit program until they spend down all of their assets and then they have to reapply again after they’ve dissipated all their assets.
Another example is somebody who has Alzheimer’s disease. They’re incapacitated and they’re in a care home nursing skilled nursing facility where they are paying $6,000 a month in care costs. Medicare /medi-cal is paying for it. If they own property like a house, when the person passes away medicare will take and file a chargeback against the property to recover their payments to that person. It might be $800,000 of chargeback.
What is a special needs trust?
A special needs trust is a certain type of trust first of all a trust has three parties a settlor or the person with the money or assets who creates the trust then there’s a trustee who manages the assets and has the assets in their name as a trustee and then there’s a beneficiary and in this example the beneficiary is the developmentally disabled child the trust is irrevocable it’s non-changeable it’s different than what you would use for an estate planning trust that is a in a revocable trust these are irrevocable and not changeable so these types of trusts are used when a person is receiving what they call means tested public assistance means tested public assistance is that if they have their own money large amount of assets cash whatever then they don’t qualify so the idea is to keep the money away from the possession and control of the person qualifying for the benefits so that those assets can be used for special types of things that the individual needs in order to have a special needs trust the trustee must have what’s called discretionary distribution rights that the trustee can decide on buying things or paying for things for the award the incapacitated person example but there’s no requirement to pay a fixed amount like 10 000 a month or something like that it’s all discretionary and the beneficiary can have no access to the funds they cannot have signatory authority on bank accounts or investment accounts and uh the ward or the person receiving the benefits cannot appoint themselves as trustee on their own special needs trust.
What is a third party created special needs trust?
A third party created special needs trust is created when someone other than the beneficiary has assets. Let’s say it’s part of an estate plan from parents to a child. The creator of the special needs trust, the settlor, has the assets, not the beneficiary. They create this trust and put their funds into it. They’re called the settlor and the person putting the money in might also be the trustee and that’s fine but they cannot be the beneficiary. In a special needs trust there is specific language in the document to protect the public benefits that the person is receiving.
For example if social security is paying the monthly rent then there would be a prohibition against the trustee paying the monthly rent or giving the beneficiary more than two thousand dollars because if the beneficiary has more than two thousand dollars in cash then they would no longer qualify for the public benefits. The third party created special needs trust is an asset protection trust in that if the ward or the disabled person files bankruptcy for example the bankruptcy court has no control over accessing that money in the special needs trust. If there’s a large creditor problem the creditors cannot come in and take the money so it’s protected from government intervention and taking the money.
What is a first party special needs trust?
Another type of special needs trust is referred to as a first party special needs trust.
This would be a situation where hypothetically let’s say somebody’s diminishing their capabilities quickly and they know that pretty soon they’re going to be incapacitated. Let’s say deteriorating with Alzheimer’s for example. So they put their own money in a special needs trust. They’re the settlor of the trust and let’s say they have another person as trustee and they’ve named themselves as beneficiary on their first party special needs trust. This trust still works for maintaining the public benefits however when the person passes away medicaid/medi-cal can come in and recapture the amount of money they paid during the person’s life. There’s also no liability protection from creditors or for the bankruptcy court so it does work. It’s sometimes created by a court with the beneficiary’s own money but it is subject to charge back from the public per the governmental agency that’s paying the public benefits.
How do spouses create special needs trust for each other?
Now let’s cover what happens when a spouse wants/needs to create a special needs trust for another spouse.
For example, if their mental capacity is diminishing quickly spouses have to create a special needs trust for the other spouse within the context of a will and not within the context of a normal what we call a revocable trust or revocable living trust or family trust that’s revocable. It must be specified in the will. If the will says there’s going to be a trust created later that’s referred to as a testamentary trust.
The large majority of special needs trusts are created for individuals with some sort of disability.
The disability could be defined as they’re not capable of taking care of their own needs for daily living such as they can’t dress, they can’t walk, they can’t talk or they can’t manage funds.
When someone doesn’t have the mental capacity to be able to think rationally and make decisions that would usually be the criteria for obtaining government benefits. Special Needs Trusts are very valuable to have for individuals that let’s say are going to inherit a large amount of money but they’re on public benefits. The objective is to keep the funds away from the direction and control of the person who has the incapacity. They’re very useful for people with disabilities and they’re quite popular and very useful.
If you have other questions about Special Needs Trusts you can contact Rex Crandell by calling 925-934-6320.
You can also email us at rexcrandell@astound.net or visit us online at rexcrandell.com
