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 limit. If the individual were to acquire countable assets 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 large sum of money, typically through a lawsuit or an inheritance. Self-settled SNTs come in two varieties in Michigan.
First party special needs trust
Created pursuant to 42 USC 1396p(d)(4)(A), this type of SNT has the following requirements: 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.
Pooled accounts special needs trust
Created pursuant to 42 USC 1396p(d)(4)(C), this type of SNT has the following requirements: the trust must be irrevocable; it must be created by the individual, the individual’s parent, grandparent, guardian, or the probate court; a non-profit organization must be the trustee; and any funds remaining at the individual’s death must remain in the “pool” to benefit other pooled accounts SNT members.
Choosing between a first party SNT and a pooled accounts SNT depends on a variety of factors.
- Ease of creation. The pooled accounts SNT is already in existence; joining simply requires the signing of a “joinder” agreement.
- Management. Because the pooled accounts SNT is managed by a non-profit organization and there are many other individuals within the “pool”, there will be less flexibility and individual attention given to each beneficiary.
A first party SNT will usually have the individual’s family member as the trustee, so the individual will be able to communicate one on one with the trustee, and the trustee will be more familiar with the individual’s goals and needs.
- Cost. Because the pooled accounts trust is already in existence, the costs to the individual to join will be minimal. However, there are usually monthly or annual fees involved for the organization to manage the accounts, which might increase if more time is spent with an individual. Fees may also be based on the amount of money invested with the organization, so that larger accounts pay more.
The costs for a first party trust will usually be front-loaded, especially if creation by the probate court is required.
In most cases, the determining factor in choosing between a first party SNT and a pooled accounts SNT is the amount of money at issue. Larger amounts can justify the costs to set up a first party SNT, which then provides maximum flexibility and familiarity with the individual through selection of an appropriate trustee.
Third party special needs trusts
Third party SNTs are the preferred type of SNT. The main advantage of a third party SNT is that unlike the self-settled SNT, which must repay the state for Medicaid it paid on the individual’s behalf, any funds remaining in a third party SNT can pass directly to the individual’s heirs or other relatives at death. 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.
Uses for special needs trusts
After the SNT is created and funded (either self-settled or third party), the most common issue then becomes the proper administration of the SNT without affecting the individual’s state or Federal benefits. It is helpful to first specify what the trustee should not do:
- The SNT funds should not be used for anyone’s benefit other than the individual (except for trustee fees for administering the trust).
- The SNT should not provide basic support such as food or housing assistance.
- The SNT should not provide cash directly to the individual.
Common uses for the SNT include purchasing supplemental health insurance above and beyond Medicaid coverage, paying for vacations/field trips for the individual, purchasing personal property, and paying for caregivers, transportation, and service animals.
Used properly, special needs trusts are extraordinary resources to enhance the lives of individuals with disabilities.