Special Needs Trust Basics

A Special Needs Trust is a legal document written by an attorney that details how the assets in the Trust will be distributed to the beneficiary (or special needs person). The most important thing to remember about a Special Needs Trust is that it ensures that assets can be received and used for the beneficiary as intended without jeopardizing governmental benefits. By utilizing a properly drafted Special Needs Trust, the disabled person can continue to receive government benefits (Supplemental Security Income, Medicaid, and other services) even though the assets in the Special Needs Trust are over the eligibility limits to receive government benefits. 

A Special Needs Trust is a document that contains rules that must be followed for property held in the Trust for the beneficiary. Special Needs Trusts can be utilized in an estate plan (your Will) or in an emergency like when a disabled person receiving government benefits gets an inheritance or wins a personal injury case. Assets in a

Special Needs Trust can be used for (depending on your state) such purposes as funeral planning, medical and dental care not otherwise covered by public assistance or private insurance, psychiatric / psychological / recreational / occupational therapy, home care aides, education, transportation, furnishing, and quality of life enhancements. However, funds likely cannot be directed to food or housing needs unless the governmental benefits are insufficient to meet those needs. 

Basically there are 3 types of Special Needs Trusts: 

1)Common Law Special Needs Trust or Third Party Special Needs Trust 

A Third Party Special Needs Trust or Common Law Special Needs Trust is the most commonly used type of Special Needs Trust. It has two important features: 

1)The assets that go into this type of Special Needs Trust must be from other individuals (mom, dad, grandparent, siblings, friends, etc) and NOT the individual with special needs. Therefore, the individual with special needs does not put his or her money in this trust, it is only to be funded with other people’s money. 

 2)When the special needs person passes away or when the Trust ends, the government is not entitled to being paid back for the government benefits it provided the individual with special needs over their lifetime. Therefore, whomever sets up the Trust can determine how the assets will go. 

As an example, Husband and Wife may create a Special Needs Trust when they are doing their Wills. The Will provides that assets will go equally to their three children but the amount that would go to their disabled child will go directly to the Special Needs Trust that they created (never to the individual with special needs). Therefore, the assets are never the disabled child’s assets (which is the important fact). The Special Needs Trust will then not be funded until the parents both die. The Special Needs trust will provide for the disabled child and when the disabled child dies then whatever is left in the Special Needs Trust can go to their other children. 

2)Payback Special Needs Trust or Self-Settled Special Needs Trust 

A Payback Special Needs Trust (or Self-Settled Special Needs Trust) is a type of Special Needs Trust commonly used in emergency situations. Although the Payback Special Needs Trust allows the individual with special needs to continue to receive government benefits, when the disabled person dies then whatever assets are left in the

Trust will have to payback the government for what the government paid out in benefits during his or her lifetime. The distinctive feature (and why the assets must be paid back) is that the assets that go into the Payback Special Needs Trust were the disabled person’s assets. Unlike a Common Law Special Needs Trust (where assets from third parties went directly to the Trust), the assets for Payback Trusts went to the disabled person directly either by gift, inheritance or lawsuit award. This type of Special Needs Trust is then not as beneficial as the Common Law Special Needs Trust. For example, if a disabled person who is receiving governmental benefits receives an inheritance or gift that would cause them to become ineligible for benefits, then a Payback Special Needs Trust can be created. Also, if someone wins a personal injury lawsuit and became disabled, then a Payback Special Needs trust can be created, the assets can be placed into the Payback Trust and the individual with special needs can continue to receive government benefits. 

3)OBRA Pooled Special Needs Trust. 

OBRA Pooled Special Needs Trust is a type of Special Needs Trust that was created under law so that non-profits could be the Trustees of the Special Needs Trust. The non-profit will be the Trustee of many Special Needs Trusts and the beneficiaries of the Special Needs Trust maintain separate accounts that are pooled for investment. This is very beneficial if there is a small amount of funds going into the Special Needs Trust or if the person who creates the Special Needs Trust does not have anyone they trust to be the Trustee (or the person who administers the Special Needs Trust). The Trustee will have to make decisions regarding disbursements, filing income taxes, and other important choices and these Trusts utilize experienced professionals. The disadvantage (or possibly advantage depending on your situation) of the OBRA Pooled Special Needs Trust is that whatever is left in the Special Needs Trust when the disabled person passes is likely kept within the non-profit and will be used for the benefit of the others remaining in the pool. 

The attorneys at Herr, Potts and Potts can discuss your situation with you and help you decide which trust would best suit your needs and how it fits within a special needs estate plan.