Author: Louise Paglen, Estate Planning Attorney, The McIntosh Law Firm, P.C.
The best and most comprehensive option to plan for a child with special needs is to set up a special needs trust, also called a supplemental needs trust (SNT). An SNT allows a special needs child or adult to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose their eligibility for certain government programs, such as Medicaid and Supplemental Security Income (SSI). An SNT can hold any type of asset, such as real estate, stocks or bonds. The SNT can be the beneficiary of a life insurance policy or retirement account and can be named as the beneficiary of a will or living trust. Assets in an SNT are managed by a trustee for the benefit of the disabled beneficiary who does not have direct control or access to the trust assets. The assets in an SNT are not counted when determining the beneficiary’s eligibility for government benefits such as Medicaid or SSI.
There are three main types of SNTs: (1) first-party SNT (2) third party SNT and (3) pooled SNT.
A first-party SNT is designed to hold the disabled individual’s own assets. These trusts are most often used when a disabled person receives a lump sum of money outside the protection of a trust, such as inheritance, gift or settlement. In the absence of proper planning, the disabled person could lose valuable government benefits. While the beneficiary is living, the funds in the trust are used for the beneficiary's benefit, and when the beneficiary dies, any assets remaining in the trust are used to reimburse the government for the cost of medical care.
A third-party SNT is most often used by parents or grandparents to provide for a loved one with special needs. A third-party special needs trust does not contain a "payback" provision. When the beneficiary dies, any funds remaining in the trust can pass to other family members.
A pooled trust is an alternative to the first-party SNT. A nonprofit organization pools the resources of multiple beneficiaries for investment purposes, while still maintaining separate accounts for each beneficiary's needs.