Special Needs Trust Rules You Should Know About: An Overview

special needs trust rules

When you have a family member with a disability or chronic illness, it’s easy to worry about what will happen after you die. Their long-term care and sustained standard of living become a critical focus in your estate planning.

If they receive government disability assistance, you may be concerned about a loss of benefits when you leave an inheritance.

Special needs trusts are designed for individuals trying to ensure the most financial support after they pass. If you want to take advantage of this valuable protection, it’s crucial to understand the special needs trust rules to guarantee the best quality of life for your loved ones.

What Is a Special Needs Trust?

A special needs trust (SNT) helps disabled or chronically ill individuals maintain critical government benefits such as Medicaid, Social Security, and Supplemental Security Income.

A trustee manages and provides assets to beneficiaries to supplement the aid they receive from government programs. Since SNT funds don’t count as income, it won’t limit eligibility for public assistance.

Special Needs Trust Rules

Special needs trusts are set up with a designated trustee who controls the assets. Trustees can be friends, family members, or fiduciary professionals such as special needs trust attorneys, corporate trust managers, or accountants.

The rules for an SNT change depending on who funds it, but there are a few general requirements.

Funds in a special needs trust can pay for many supplemental items that government aid can’t provide. The trust needs to pay for these directly, as beneficiaries can’t receive cash payouts. Beneficiaries can still get prepaid cards, tickets, and other stored-value items if the trust purchases them straight from the vendor.

Another basic rule of special needs trusts is the sole benefit rule, which applies to many disability assistance programs. In the case of an SNT, payments need to go toward a good or service, and the beneficiary needs to receive all the benefits from it. It’s a vague rule, and the interpretation has become more lenient over time to allow more people to use purchases as needed.

First-Party SNT

The beneficiary provides funds for the trust in a first-party SNT. Funds often come from an inheritance or settlements from a personal injury lawsuit. Other names for this type of trust include d(4)a, supplemental needs, or self-settled trust.

The following are the essential rules of a first-party special needs trust:

  • The SSA must classify the beneficiary as disabled
  • The beneficiary must be under 65 years of age when the trust is set up
  • A legal guardian, parent, or the court must be the one to set up the trust for the beneficiary

A first-party SNT is always an irrevocable trust, meaning it can’t be changed or canceled. It also means that assets can’t be taken by creditors. When the beneficiary dies and the trust ends, Medicaid will usually get reimbursed before the remainder beneficiaries receive any remaining funds.

States set many SNT rules, including:

  • What kind of purchases are allowed
  • How much money can be used each year
  • How much compensation the trustee receives for their services

Failing to follow the rules may cause the beneficiary to lose Medicaid benefits. For information on first-party SNT rules, contact your state’s Health and Human Services Department or a special needs trust attorney.

Third-Party SNT

A third-party SNT is set up by a separate grantor who funds the trust. It’s usually a parent, grandparent, or guardian trying to ensure long-term protection for a disabled family member. The grantor can set up these types of SNTs while they’re alive, or they can set it up in their will in what’s called a testamentary trust.

There is no age restriction for third-party SNTs, and grantors have more flexibility in managing the terms. These trusts can be revocable in some cases, and there is often no rule for paying back Medicaid. Some states do require that the beneficiary be disabled before a grantor can set up a third-party SNT.

When the trust ends, remainder beneficiaries can receive the full amount that’s leftover. There is no need to pay back Medicaid or other support programs.

Pooled Special Needs Trust

A non-profit organization pools funds from several grantors for different beneficiaries in a pooled SNT. Each beneficiary has an individual account that is serviced by a non-profit member. These kinds of SNTs are convenient for grantors who want to leave a smaller amount for their loved ones without having to set up a separate SNT.

Pooled SNTs have an age limit, but it doesn’t matter whether the beneficiary or a separate grantor funds it. Although the funds go to the beneficiary, the pooled amount is managed and invested as one. When the beneficiary dies, the remaining money goes to the state to pay back Medicaid and other government support programs.

How Can Your Beneficiaries Use Special Needs Trust Funds?

A critical rule in special needs trusts is that funds can only supplement, not replace, government benefits. That means that it can’t pay for any medical care or essential needs that the government manages.

Funds will instead go toward expenses that are not covered by the government and can improve the beneficiary’s quality of life. Such expenses include:

  • Medical treatment that Medicaid doesn’t cover
  • Caregivers
  • Personal care services
  • Computer or entertainment equipment
  • Travel and vacations
  • Club membership
  • Furniture and appliances
  • Sporting goods and fitness equipment
  • Education and vocational training
  • Household utility costs
  • Final expense insurance

The list of covered items is broad, and there are few limitations on what an SNT can buy. As long as there is no payout in the way of cash, checks, investments, or retirement savings, the distributed funds won’t count as income.

Talk With a Special Needs Trust Lawyer Today

A special needs trust is an essential tool in ensuring the best quality of life and continued care for your loved ones long after you’re gone. Discussing your options with a special needs lawyer will provide valuable peace of mind that they’ll receive the assistance they deserve for their entire lives.

If you need help navigating special needs trust rules, our legal team at Smith Barid is here to offer the guidance and resources to simplify the process. Contact our office to learn more about how we can help you in your estate planning.


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