Special Needs Planning
In this section we will review Special Needs Trust options in Virginia, and how we help clients with various types of special needs trusts every week at Smith Strong, PLC in Richmond and Williamsburg, Virginia.
And not to worry: You don’t have to know which type of trust you need, we can meet with you and guide you every step of the way.
For those that like to have the overview before scheduling their appointment with us, let’s review the following ideas: (1) What is Special Needs Trust?; (2) Third-Party Special Needs Trusts; (3) First-Party Special Needs Trusts; and (4) When to Use Pooled Special Needs Trusts.
What is a Special Needs Trust?
A Special Needs or Supplemental Needs Trust (abbreviated “SNT”) is a type of trust used to protect assets for a disabled person who is receiving or is likely to need public benefits.
At its core, any trust is simply a legal bucket that holds the person’s ‘stuff.’
The trust owns the assets, while the trustee manages the assets for the benefit of the beneficiary. The trust agreement, created by the person (typically a parent) creating the trust, lays out the terms of the trust:
- what the purpose of the trust is;
- who the trustee is;
- who the beneficiary is;
- how the trust assets are to be managed; and
- how and when the trust assets are to be distributed.
Since the trust is the owner of the assets it holds, assets put into a properly drafted SNT for the benefit of a disabled person do not belong to the disabled person and are not counted as available assets for means-tested benefits.
The main purpose of these trusts is to set aside funds to provide for needs not met by public benefits.
A SNT is typically designed to restrict payment for food and shelter but can usually pay for a number of other needs including:
- dental care and non-covered medical care;
- psychological support services;
- rehabilitation; training programs;
- home health aides;
- special nursing care;
- hair and nail care;
- electric wheelchairs;
- mechanical beds;
- telephone, television, and computer equipment and service;
- internet access;
- travel, driving, and cultural experiences.
There are two main types of Special or Supplemental Needs Trusts.
A Third-Party SNT is one created and funded by one person for the benefit of another person.
A First-Party SNT (also called d4a trust) is a SNT created for a disabled person using that person's own money.
The following articles provide an overview of the different types of Special Needs Trusts.
It can be difficult to properly establish and administer SNTs, so it is important to work with an attorney who has significant experience in this area not only in setting up a SNT, but also throughout its administration. Smith Strong, PLC, our firm, is a trusted partner for our many special needs trusts and supplemental needs trusts clients.
Third-Party Special Needs Trusts
A “Third Party Special Needs Trust" (SNT) is a trust that is created and funded by someone other than the beneficiary for the benefit of a person with special needs.
This type of trust can be created while the settlor is alive by using a revocable or irrevocable living trust, or can be created upon his or her death through a living trust or Last Will and Testament. If a third-party SNT is created and funded during the settlor’s lifetime, assets may be placed the SNT while the settlor is alive and upon his or her death.
This type of third-party SNT can also be used to receive any inheritance that may come from a grandparent or other family member, provided the SNT, not the person with special needs, is properly named as the beneficiary.
The trustee must be someone other than the special needs beneficiary (in other words, other than the special needs child).
Because the SNT will own the assets, the special needs beneficiary will not lose government benefits on account of the assets in the SNT as long as the special needs beneficiary does not have any control over how the assets are used.
On the contrary, the SNT allows the beneficiary to receive vital public benefits, while the funds in the SNT can be used for the special needs beneficiary to improve care and quality of life until his or her own death, at which time any assets left in trust can pass to whomever is named in the trust document as a successor beneficiary.
Your Smith Strong, PLC attorney in your first meeting with us will work with the settlor to determine the exact provisions to include in the SNT.
Information about the disabled beneficiary’s age, current and future benefits, eligibility requirements, type and value of assets to be placed in the trust, and how the settlor wants the trust funds used must be considered.
First-Party Special Needs Trusts
Unexpected events may trigger money being paid directly to a person with special needs.
A third-party special needs trust cannot hold funds that belong to the disabled individual. If a person is about to receive money or property in an amount that will cause him or her to lose benefits, whether from an inheritance, life insurance payout or personal injury settlement, a First-Party Special Needs Trust, often called a "(d)(4)(A)" trust, so-named after the U.S. Code section that authorizes this type of trust, is a planning option that can help set aside some or all of the money for supplemental needs and still allow the person to stay on public benefits without any period of disqualification.
If a person has already received money or property in an amount that has caused him or her lose benefits, the First-Party SNT can still be used as a tool to set aside some or all of the money for supplemental needs and allow the person to re-obtain public benefits.
A First Party SNT must be created while the disabled individual is under age 65 and must be established by his or her parent, grandparent, legal guardian, or by a court.
A First Party SNT also must provide that at the beneficiary's death any remaining trust funds will first be used to reimburse the state(s) that Medicaid has paid on the beneficiary's behalf during his or her life.
Because of this payback provision, this type of trust is also sometimes called a "payback trust."
After the state is paid back, any assets that remain in the trust can pass to the remainder beneficiaries named in the trust instrument.
When To Use Pooled Special Needs Trusts
A Pooled Special Needs Trust is a special type of SNT that is created by a nonprofit organization, with the nonprofit organization acting as the trustee of the pooled SNT, or selecting the trustee.
Individuals have separate accounts in the pooled SNT, but all the money is pooled together and invested by the trustee.
Individual beneficiaries get the services of a professional trustee and more investment options because there is more money overall, hence pooled.
A third-party pooled trust provides a way to benefit from a special needs trust without having to create one yourself.
Just as with the single-beneficiary trusts discussed above, there are both "third-party" pooled SNTs (which you can use to give money during life, or leave money upon death, for a special needs beneficiary) and "first-party" pooled SNTs – also called "(d)(4)(C)" trusts – used to protect money that belongs to the special needs beneficiary.
Unlike the First Party SNT which may be created only for those under age 65, pooled SNTs may be for beneficiaries of any age and may be created by the beneficiary himself.
In addition, at the beneficiary's death the state does not have to be repaid for Medicaid expenses so long as the funds are retained in the trust for the benefit of other disabled beneficiaries.
Although a pooled trust is an option for a disabled individual over age 65 who is receiving Medicaid or SSI, those over age 65 who make transfers to this type of trust may incur a transfer penalty.