If you wish to make a gift of assets to someone with special needs, care must be taken as to how you do this. You might do more harm than good. The same is true if a beneficiary with special needs receives assets from a third party other than you. To ensure that you do not interfere with the beneficiary’s eligibility for much-needed government assistance programs, a Special Needs Trust may be used. At Clarity Legal Group®, our attorneys do special needs planning which can help our Durham, Chapel Hill, and Raleigh area clients understand the types of Special Needs Trusts available. I want to outline the primary options in this post.
Is a Special Needs Trust Necessary?
A Special Needs Trust is a specialized type of trust that is intended to protect assets in order to provide financial support to someone who has special needs or who is disabled. The reason this specialized trust is often necessary is directly related to the fact that many adults with special needs or disabilities depend on state and federal assistance programs such as Medicaid, Medicare, or SSI. Those programs, however, typically have income and asset limits that cannot be exceeded by recipients. Giving assets to someone with a disability or special needs, therefore, can result in disqualification for many of these much-needed programs. The solution is often found in the creation of a special needs trust. The concept behind any special needs trust is to make assets available for the disabled person while keeping them from being countable among his or her resources for the purposes of qualification for benefits.
Types of Special Needs Trusts
Recognizing how a Special Needs Trust will benefit a beneficiary is the first step in protecting assets intended for that beneficiary. Next, you need to understand the types of Special Needs Trusts available to ensure that you use the right one. The two types of Special Needs Trusts you may decide to create are:
- Third-Party Special Needs Trust — As the name implies, a third-party special needs trust is established by the third party with assets of the third party (or even another party, but not the special needs person) for the benefit of a person with a disability or with special needs. This type of trust is most often established by a parent, or other family member, for the benefit of a child with special needs and uses assets of the parent, grandparent or family member. This kind of trust is typically referred to as “fully discretionary”, meaning a Trustee appointed by the person who creates the Trust will determine whether and whether the funds are used for the disabled person (the “beneficiary”). Because the assets held in the trust do not belong to the beneficiary and because the beneficiary does not have a legally enforceable right to distributions from the trust, those assets do not disqualify the beneficiary from eligibility for assistance programs such as Medicaid and SSI. In fact, the idea behind this type of special needs trust, which is typically referred to in North Carolina as a “supplemental needs” trust, is that the assets held in the trust will be used to “supplement” the benefits provided by the state and federal government.
- First-Party Special Needs Trust — The other common type of special needs trust is a first party, or self-settled, special needs trust. This type of special needs trust is established using assets of the disabled individual or person with special needs. It must be established by the parent, grandparent, guardian of the person with a disability, or by a court. Only the person with a disability can be the beneficiary of the trust. This type of special needs trust is most frequently needed when a disabled individual receives a lump sum of money, such as the result of a settlement for injuries in a personal injury accident. The lump sum would likely disqualify the beneficiary from eligibility for assistance from Medicaid, SSI, and other state and federal assistance programs. One of the other important differences between a third part and a first-party special needs trust is that with a first-party trust, any assets remaining in the trust upon the death of the beneficiary must be used to pay back Medicaid. With a third-party special needs trust there is no need to worry about repaying Medicaid and the trust can specify that any such remaining funds are distributed to a family member or perhaps a charity of choice.
Contact our Special Needs Planning Attorneys serving the Raleigh, Cary, Durham, Chapel Hill area
Setting up a Special Needs Trust is not easy, but it’s also an approach which if correctly done, is long recognized as effective by experienced special needs planning attorneys and the government agencies which administer the applicable programs. Once you set the trust up, don’t “set it and forget it”. It is essential that it be carefully and properly administered once set up and funded. It’s easy to make a misstep as the Trustee of a Special Needs Trust and I encourage those who have them to regularly review their operation, record keeping, and management with experienced legal counsel.
If you have additional questions or concerns about choosing the right type of special needs trust for your family member, about how to incorporate special needs planning into your estate plan, or about proper management and administration of an existing trust, we would be happy to help at Clarity Legal Group®. We help clients form all over the Triangle area. Both my colleague Jonathan Williams and myself are experienced special needs attorneys. You can reach us at Clarity Legal Group® by calling us at 919-484-0012 or contact us online.