Special needs trusts (SNTs) are instruments used to protect individuals with disabilities while expanding the resources available to provide diverse care options.  SNTs are vital because these individual often rely on a combination of state and Federal benefits which have strict asset limits, such as Medicaid and Supplemental Security Income (SSI).   Both programs have a $2,000 countable asset/resource limit.  If the individual were to acquire countable assets or resources above that threshold, then those benefits would be suspended, which could be devastating due to healthcare and prescription costs. 

SNTs can be broadly categorized into two types:  self-settled and third party.

Self-settled special needs trusts

Self-settled SNTs are called as such because they are funded with the individual’s own assets.  These types of trusts are created pursuant to Federal law and are used when an individual comes into a sum of money above the applicable limit, typically through a lawsuit or an inheritance. 

The most common self-settled SNT is the first party special needs trust.  It has the following requirements for creation:  the trust must be irrevocable; the individual must be under the age of 65; it must be created by the individual or the individual’s parent, grandparent, guardian, or the probate court; and any remaining funds in the trust after the individual’s death must first repay the state for the amount of Medicaid funds spent on the individual.

Third party special needs trusts

Third party SNTs are the preferred type of SNT.  The main advantage is that unlike the self-settled SNT, which must repay the state for Medicaid benefits paid on the individual’s behalf, any funds remaining in a third party SNT can pass directly to the individual’s heirs, relatives, or charities.  There is also no age limit unlike the first party self-settled SNT.

Third party SNTs are will usually be created by the individual’s parents to hold any inheritance they may wish to leave the individual.  Other family members can then designate the third party SNT in their own estate plan.   Unlike the self-settled SNT, the third party SNT can be revocable up to the moment it is funded, allowing for maximum flexibility to reflect changes in the individual’s circumstances or changes in the law.