A priority of many estate-planning parents is making sure that their children continue to have the care that they need after the parents are gone. This can be an especially salient concern for parents whose children are physically or mentally disabled. Parents hoping to provide for children with disabilities often establish special needs trusts (SNTs), also call supplemental needs trusts. SNTs allow individuals to receive financial aid without compromising their eligibility for government assistance programs, such as SSI and Medicaid. This article explains the general nature of trusts and examines the unique features of special needs trusts.
Trusts
To create a trust, one party with title to property (the trustor) conveys that property to another party (the trustee), on a condition that the property be used for the benefit of another (the beneficiary). When creating a trust, a trustor can specify what the trust property may be used for, and they may transfer many kinds of property into the trust (real estate, stocks, savings accounts, etc.). A common trust set-up involves a parent conveying property to their attorney to be used for the future education of the parent’s child. In that situation, the parent loses control over the assets in the trust, and the attorney can only use them to pay for goods and services in the child’s educational interests, e.g., the child’s college tuition.
Trusts may either be revocable or irrevocable. A revocable trust may be revoked or modified by the trustor, while an irrevocable trust may not. If the education-trust example above were revocable, the parent could decide to revoke the trust and recover their assets before the child finished school. If it were irrevocable, the parent would have no choice but to let the trust continue according to its original terms.
Trusts may begin either during the trustor’s life (inter-vivos trusts) or at the moment of their death (testamentary trusts). An inter-vivos/living trust may give the trustor less control over how their assets are managed during their life, but it can help their estate avoid a lengthy and expensive probate process upon their death. A testamentary trust will allow the trustor to retain complete control over their assets while they are alive, but the trust might only take effect after the trustor’s Will has made it through probate.
Special Needs Trusts
Special Needs Trusts (SNTs) are trusts especially designed to care for individuals with mental or physical disabilities. 42 U.S.C. § 1382c(a)(3) (defining “disabled”). They come in two varieties – General Support and Supplemental Care. General Support SNTs are designed to be the sole source of financial support for a disabled individual. Supplemental Care SNTs are designed to supplement the financial support that is available from other sources. Most SNTs are for Supplemental Care, allowing the beneficiary to claim benefits from multiple sources. The remainder of this article will focus on Supplemental Care SNTs.
People with disabilities often rely on programs like SSI and Medicaid to provide for their basic necessities. However, those programs base eligibility off of a participant’s countable assets; if the participant has too many assets, they will not be eligible for federal aid. Direct gifts and most trust funds count towards an individual’s countable assets, meaning that a parent who leaves their disabled child an inheritance or a normal trust fund risks disqualifying that child from SSI and Medicaid. 42 U.S.C. § 1396p(d)(1). Supplemental Care SNTs are special because their trust property does not count towards the beneficiaries’ assets. 42 U.S.C. § 1396p(d)(4)(A). This means that a parent can leave their disabled child as many assets as they want in a Supplemental Care SNT, and that child can still receive full federal benefits.
Like with any other kind of trust, the trustor of a Supplemental Care SNT conveys title over some of their assets to a trustee, and that trustee is authorized to use those assets for the designated beneficiary. However, to qualify as a Supplemental Care SNT and remain uncountable, the trust must be irrevocable, and the beneficiary must not have any authority to modify the trust or to demand payments from it. If the beneficiary maintains some control over the SNT, the assets in the trust will be considered countable and will diminish the beneficiaries’ eligibility for federal aid.
SNTs may be first-party funded or third-party funded. The assets in a first-party SNT are contributed directly by the beneficiary. These are normally established when the beneficiaries’ disability was caused by the actions of a third party, and that third party pays a settlement or court-ordered judgment as compensation. See In re Gaurdianship of Hollis, 2014 WL 5685570 at *1 (Tex. App.—Hous. [14th Dist.] 2014, no pet.) (mem. op.) (describing SNT funded by the beneficiary with her personal injury settlement from an automobile accident). The newly disabled individual may put their award into a Supplemental Care SNT to prevent that award from compromising their eligibility for federal aid. The assets in a third-party SNT are conveyed by someone other than the beneficiary, typically a parent or guardian.
1Peace of Mind: A Guide to Supporting Special Kids With Special Needs, Texas Young Lawyers Association, 38-40. https://www.texasbar.com/AM/Template.cfm?Section=Family_Law2&Template=/CM/ContentDisplay.cfm&ContentID=23443.
If a potential trustor does not want to establish an individual trust for their beneficiary, or if they cannot find a suitable trustee, they may opt to join a pooled SNT. A pooled SNT is run by a nonprofit and “pools” SNT investments from several different trustors. The nonprofit will invest and save all of these contributions together, and disperse the trust property to multiple beneficiaries. Like other Supplemental Care SNTs, the money invested in a pooled trust will not count against the beneficiaries’ eligibility for federal aid. 42 U.S.C. §1396p(d)(4)(C).
No matter the specific type, the assets in a Supplemental Care SNT can only be spent in certain ways. They can never be used to provide the beneficiary with a large cash payment, and they can only rarely be used to pay for the beneficiaries’ housing and food. Instead, the assets in SNTs are primarily used for supplementary purchases, like out of pocket medical expenses, therapy, travel, education/training, and entertainment. Any SNT assets used for improper purchases may be counted against the beneficiaries’ eligibility.
Parents often establish Supplemental Care Special Needs Trusts for their children with disabilities. SNTs provide a beneficiary with financial assets without compromising their eligibility for federal aid programs, like SSI and Medicaid. As with any other trust, a SNT can take effect during the trustor’s life or upon their death, and it can be funded by the beneficiary or by a third party. However, a SNT must be irrevocable, and the assets may only be used for supplemental purchases. Trustors may also contribute their assets to a pooled SNT, which will manage those assets along with the assets of several other trustors on behalf of multiple beneficiaries.
