Special Needs Trusts

What Is a Special or Supplemental Needs Trust?

A Special Needs Trust describes an Irrevocable Trust holding assets for a person receiving needs-based government benefits. The person who benefits from the Trust is the “beneficiary.” Typically, the Beneficiary is an individual with physical or mental disabilities who qualifies for needs-based benefits, such as Medicaid. Giving this person money or making them an heir would disqualify them. Congress developed Special Needs Trusts to hold assets for these people without excluding them from benefits. A Special Needs Trust allows you to look out for your loved one by providing them with little extras. You improve their life but don’t harm their benefits.

First-Party Special Needs Trusts

An irrevocable trust, a First-Party Special Needs Trust holds a special needs person’s assets. The Trustee uses these assets for the Special Needs Person’s care. But it does not disqualify them from needs-based government benefits like Medicaid.

First, Party Special Needs Trusts often hold legal settlements. Other examples include inheritances or divorce settlements. The goal is to continue using needs-based benefits and enjoy the benefits of the new assets. Because these are the SNT person’s assets, unused amounts must be applied to reimburse Medicaid.

Example: George, a Philadelphia resident, becomes a Special Needs Person due to a car accident. He begins collecting Medicaid. Years later, his lawyer obtained a $100,000 settlement. George places the money in a First Party Special Needs Trust. George continues to collect Medicaid. At his death, the SNT still holds $60,000. George used $150,000 of Medicaid benefits. The successor trustee must apply the $60,000 towards the $150,000 “debt.”

Third-Party SNT: Trusts Set Up by the Family

Unlike first-party special needs trusts, third-party trusts are irrevocable trusts funded using other people’s money. If properly drafted, the Trustee can use these funds to provide for the Special Needs Person without disqualifying them from needs-based government benefits such as Medicaid. Because the funds never belonged to the Special Needs Person, at death, any remaining money does not have to be applied to reimburse Medicaid.

A Parent’s estate plan will often include a Third-party SNT.

Example: Grandpa is a Bucks County, Pennsylvania resident and directs his Estate Planning Lawyer to draft a Will. The Will includes a Third-Party Special Needs Trust for the Grandson. At Grandparent’s death, the executor funds the Trust. The Trustee can provide for the Grandson. Grandson, a Camden County, New Jersey resident, continues to receive NJ Medicaid benefits. At Grandson’s death, the SNT still holds $100,000. This money does not need to be paid back to New Jersey for Medicaid use. Instead, it passes outright to the Granddaughter, per the grandparents’s Will terms.

Pooled Special Needs Trusts

Sometimes, a Special Needs Person owns assets, but forming a First Party Special Needs Trust is inconvenient or impractical. In these cases, the funds can be contributed to a Pooled Special Needs Trust. As the name suggests, the funds are “pooled” with those of other Special Needs people’s resources, creating economies of scale. The professional Trustee manages the funds for the Special Needs person, but at death, the funds must be applied to reimburse Medicare.