Special needs trusts – Part 3: Which type of SNT meets your needs?

Part 1 of the Special Needs Trust series discussed what they are and why they are a good idea (to provide future financial stability for your disabled son or daughter). Part 2 of the series covered who should prepare your SNT: you, or an attorney (preferably one with SNT experience).

Here in Part 3, we’ll look at the different types of special needs trusts our lawyer friends have concocted. Yes, as if a “special needs trust” isn’t specialized enough, it turns out there are three types of special needs trust. Each has pros and cons. Since it’s good to know what the options are, especially when the subject is “your child’s future welfare,”  here’s an overview of the three types.

Third-party special needs trust (also known as a family trust). The third-party SNT is the most popular variety; it’s what our family has. The funding for a third-party trust can come from anybody – except the person who is the beneficiary.

  • Parents can put cash, investment funds, real estate, or other assets in the trust.
  • Relatives and friends can contribute too.
  • Parents or others can also make the trust the beneficiary of life insurance policies and the like.
  • The trust can be designated as an inheritor of the estate of the parents, grandparents, the nice guy down the street, etc.

Unlike the other two types of SNTs, this one allows the creators of the trust to allocate all of the money remaining in the trust after the death of the beneficiary.  Those funds can be designated for surviving siblings, grandchildren, one or more charities of your choosing – whomever and however you wish.

Third-party trusts are costly to set up (unless you do it yourself) and require either finding a family member who’s willing and competent to serve as trustee, or paying a professional at a financial institution to be the trustee. (Part 4 will look at trustees: what they need to do, and how to choose them.)

First-party special needs trust (also known as a (d)(4)(A) trust, Type A trust, or court-ordered trust). This type of trust is often set up if the disabled son or daughter has assets of his/her own in excess of $2000. Here are a few ways that might happen:

  • a relative dies and leaves an inheritance to the individual, unaware that assets above $2000 render the disabled recipient ineligible for government benefits like SSI and Medicaid.
  • the individual was able to work and save for a time before mental illness or some other calamity left him/her unable to earn money indefinitely.
  • the individual receives money as a result of an accident settlement.

Even though the trust is funded by the beneficiary’s own assets, it must be created by a parent or grandparent (with or without an attorney’s help), or by a court. The trustee, not the individual, controls how money is invested and disbursed.

Remember how I said that with third-party trusts, the person creating the trust can specify what happens to all the funds after the death of the beneficiary? Not so here: with a first-party trust, the government gets reimbursed for medical costs during the individual’s lifetime. So if the trust fund has $6000 in it when your child dies, but s/he had used $8000 worth of Medicaid overall, the government takes the $6000 – nothing is left for anybody else. If your child had used only $3500 worth of Medicaid, there would be $2500 left for someone to receive. When the trust is established, you can specify who will inherit what’s left after the government recovers the Medicaid costs.

Pooled trust (also known as a (d)(4)(C) trust). A nonprofit organization runs the pooled trust, which manages the investments from many individual beneficiaries. Each individual has his/her own account within the pooled trust. Financial experts at the nonprofit use the pooled money to make stable investments. They also provide fund management services to the individuals.

With a pooled trust,

  • the individual doesn’t have to rely on a family member to set up a trust or to manage it.
  • assets belonging to the disabled individual can be put in the trust. However, parents and others can also contribute.
  • the organization running the pooled trust appoints a trustee for each account holder.
  • from what I gather, the expenses associated with a pooled trust are significantly less than using an attorney for all your SNT needs.

As with a first-party trust, the government has first dibs on the funds that are left after the beneficiary dies, to recoup medical costs as much as possible. Also, in some states, the nonprofit organization is allowed to keep a percentage of what remains in the account to help support its mission. (But this source says all the leftover money stays with the nonprofit…? I guess we can conclude that with a pooled trust, one way or another, little or nothing will be available after the trust beneficiary passes away.)

***

If you want to read more about the different types of special needs trusts, feel free to follow this link and/or this one.

Any of these special needs trust varieties should allow the individual to collect SSI and to benefit from Medicaid – as long as certain rules are followed. What those rules are will be covered in a later installment – don’t you love cliffhangers?

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About janet565

I've lived in the Inland Empire of Southern California since 1982. Born and raised in New Jersey, I've also lived in upstate New York and in Oregon. My profession involves maps and geography, which is usually very interesting. My hobbies are pretty boring - none of them involve tigers (or ligers) or jumping out of aircraft - so they do not bear mention here. I hope you find the blog useful, and wish you well....

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