Types of Sub-Trusts: What is a Special Needs Trust?
Carrying on with our blog series on sub-trusts, we now shine the spotlight on the special needs trust (SNT). A sub-trust is a smaller trust created within a larger main trust to serve a specific purpose. It typically comes into effect after the death of the trustor(s), ensuring that certain goals—such as providing for a loved one’s care—are carried out. When used as a sub-trust, the SNT becomes a valuable tool, offering financial support without jeopardizing the beneficiary’s eligibility for essential public benefits. In this blog, we will explore what makes a special needs trust unique, how it works, and how it compares to another important planning tool—the ABLE (Achieving a Better Life Experience) account.
What is a Special Needs Trust?
A special needs trust, also called a supplemental needs trust, is a trust that is created to hold and manage assets for a person with a disability or special needs. The SNT helps meet their immediate financial needs while safeguarding their eligibility for essential government benefits such as Medicaid or Supplemental Security Income (SSI).
In an SNT, the grantor sets up a trust, the trustee manages and distributes the funds, and the beneficiary is the person requiring special support. The SNT provides extra financial support for the beneficiary without taking away or replacing the government benefits they are meant to receive or are already receiving.
The key to how an SNT works is that its assets do not count as the beneficiary’s personal resources. Thus, the beneficiary is kept below the financial threshold required for government benefits. Furthermore, SNTs can easily be customized to meet the unique needs of both the beneficiary and the family.
Types of Special Needs Trust
In general, there are two types of SNTs:
First-Party SNT
A Special Needs Trust is considered a first-party SNT if the trust is funded by the beneficiary’s own assets. These funds can come from the beneficiary’s savings, inheritance, or unexpected income, such as a personal injury settlement. Upon the beneficiary’s death, the remaining funds in the trust may be used to reimburse the government for any benefits received. First-party SNTs are often irrevocable from the moment they are created, but their revocability still depends on the terms of the main trust they are a part of.
Third-Party SNT
A Special Needs Trust is considered a third-party SNT when the trust is created and funded by someone other than the beneficiary, such as a parent or grandparent. Third-party SNTs are often used as a sub-trust in estate planning, especially as a part of a family estate plan. An SNT as a sub-trust allows family members to leave assets to the trust without subjecting these to government payback provisions after the beneficiary’s death.
A third-party special needs trust (SNT) is typically revocable while the grantor is alive, meaning the grantor can change or cancel it as long as they remain competent. However, the sub-trust itself is not activated until after the grantor’s death, at which point it generally becomes irrevocable. This ensures that the trust's assets are managed according to the grantor’s wishes, providing financial support for the beneficiary while preserving eligibility for public benefits.
Benefits of a Special Needs Trust
The main benefits of creating an SNT include:
1. Preserves Government Benefits
The SNT owns the assets that support the beneficiary’s well-being and, therefore, is not considered “available” by assistance programs. Thus, the beneficiary can still qualify for the benefits from these programs. In other words, the Special Needs Trust provides the funds to supplement these government benefits, ensuring adequate and long-term care for your loved one.
2. Fund Flexibility
Disability assistance programs may limit their support on medical bills and similar healthcare-related expenses. On the other hand, SNT funds can be used for various goods and services, including education, recreation, personal care, transportation, and more, improving the beneficiary’s quality of life. Setting up an SNT for your loved one ensures that you provide the funds for holistic life support while you are alive and even after you’re gone.
3. Managed by a Trustee
By putting the assets for your loved one into a trust, you let a trustee oversee the trust and manage the assets. This can provide peace of mind to family members, knowing that a responsible person or professional is making decisions in the best interest of the beneficiary. Trustees are also bound by fiduciary duty to follow the terms of the trust and protect the assets from financial abuse. You can rest assured that your loved one will receive the support you intended for them, and they won’t be overwhelmed with the task of managing the assets.
4. Fund Protection
Because the trust owns the assets, they are generally protected from legal judgments or claims from your or your beneficiary’s creditors. Thus, creditors or lawsuit winners will not be granted access to your Special Needs Trust funds, ensuring your loved one’s financial security. In addition, when you set up the trust for your loved one, i.e. third-party SNT, and they die before you, any excess funds remain in the trust. The funds can then go to other family members or beneficiaries, protecting the funds from going to the government as benefits reimbursement.
Special Needs Trust vs. ABLE Account
An ABLE account is a tax-advantaged savings account that allows people with disabilities and their families to save and invest money for disability-related expenses. Both SNTs and ABLE accounts are useful tools for improving the financial security of individuals with disabilities, but have the following differences:
Fund Limits
SNTs have no limits on the amount of money and assets placed into the trust. Thus, it is a good option for families looking to pass on large inheritances or settlements to a loved one with a disability or special needs. ABLE accounts, on the other hand, have an annual contribution limit of $18,000. There is also a maximum account balance limit of $100,000, above which SSI benefits could be affected.
Control and Access
In SNTs, the funds are managed by a trustee, not the beneficiary. Following the terms of the trust, the trustee must use the trust’s assets in the beneficiary’s best interest. In an ABLE account, the beneficiary, or a designated individual, has direct control and access over the account and its funds. If the beneficiary is capable and has sound judgment, they can benefit from the independence and flexibility of an ABLE account.
Allowable Expenses
SNT funds can be used for a broader range of supplemental expenses and are not limited to the basic needs covered by government assistance. For example, you can use SNT funds on vacations, personal care, entertainment, and other expenses that enrich a disabled or special needs person’s life. ABLE account funds, on the other hand, are limited to use on disability expenses only, such as education, housing, healthcare, transportation, and other disability-related costs. If not planned correctly, these expenses may incur tax penalties.
Payback Provisions
Special Needs Trusts, particularly third-party types, can preserve wealth for future heirs by preventing the reimbursement of benefits upon the beneficiary’s death. For ABLE accounts, any remaining funds may be used to pay back Medicaid for services the beneficiary received after the account was created.
When to use which, you ask? For larger estates, when the grantor already has a trust in place or when the aim is to have a trustee manage assets, a Special Needs Trust may be the more appropriate option. For smaller sums of money and for situations where the beneficiary wants more control, an ABLE account can complement an SNT or stand alone as a solution. It depends on your comfort level with the allowable expenses and payback provisions.
How Rilus Law Can Help You Plan for Your Loved One’s Future
Special needs trusts and ABLE accounts are two of the most valuable tools in providing financial security for your loved one with a disability or special needs. If you’re considering setting up an SNT or exploring an ABLE account, it helps to first consult with an experienced estate planning attorney. The Rilus Law team is experienced with setting up trusts to serve all kinds of individuals and families, and we can help you select the right option for your situation and optimize the benefits of these tools. Planning for an uncertain future is never simple, but with the right legal support, you can secure adequate and long-term care for loved ones with special needs.