If you have a child, grandchild, or other loved one with a disability, providing financial support through your estate plan requires considerably more care than simply leaving that person an inheritance. Many individuals with special needs rely on means-tested government programs, including Supplemental Security Income (SSI) and Medicaid, that impose financial eligibility requirements. An outright inheritance or substantial financial gift can result in the assets intended to improve your loved one’s financial security interfering with access to essential benefits. A properly structured Special Needs Trust (SNT), sometimes called a Supplemental Needs Trust, can provide an alternative by holding and managing assets for a beneficiary without giving the beneficiary direct ownership of the trust property. For those who wish to provide financial security to a loved one with special needs, the Long Island attorneys at Eghrari Law Firm explain what you should know about creating a Special Needs Trust in New York.
What Is a Special Needs Trust?
A trust is a legal arrangement through which a Trustee holds and manages property for one or more beneficiaries according to the terms established in the trust agreement. A Special Needs Trust is a special type of irrevocable trust that is designed to provide resources for an individual with a disability while preserving eligibility for means-tested government benefits when applicable requirements are satisfied.
Instead of giving property directly to your loved one, assets are held in the trust and administered by the Trustee. Moreover, because the trust is an irrevocable trust, the beneficiary does not have direct control over the trust property. Instead, the beneficiary has a legal interest in the trust assets, and the Trustee makes distributions in accordance with the trust agreement. The objective is to supplement government benefits rather than replace them by using the trust assets to improve the beneficiary’s comfort, independence, and quality of life.
Why Can an Outright Inheritance Create Problems?
Leaving an inheritance directly to a loved one with special needs may seem like the simplest approach, but simplicity can come at a significant cost. Programs such as SSI and Medicaid are needs-based, meaning that eligibility depends, in part, on the recipient’s income and resources. If a beneficiary suddenly inherits money or other property outright, those assets may affect new or continued eligibility. A Special Needs Trust changes the structure of an inheritance left to a beneficiary with special needs to ensure that the value of the inheritance is not used when determining benefit eligibility.
First-Party and Third-Party Special Needs Trusts Are Not the Same
Once you have determined that a Special Needs Trust (SNT) is necessary, the next crucial decision you need to make is which type of SNT is appropriate based on the source of the funds. A first-party SNT is funded with property that belongs to the individual with special needs while a third-party SNT is funded with property belonging to someone else, such as a parent or grandparent. Although both may be designed to preserve eligibility for means-tested benefits, they are governed by different requirements and can produce significantly different results when the beneficiary dies.
When Is a First-Party Special Needs Trust Appropriate?
A first-party SNT may become necessary when an individual with special needs already owns, receives, or becomes entitled to significant assets. For example, the beneficiary might receive proceeds from a personal injury settlement or receive a direct inheritance from a relative who did not consider the consequences of a direct gift. Because the property belongs to the beneficiary, a first-party SNT is the best option. Federal law imposes specific requirements on first-party SNTs, including:
- The beneficiary must satisfy applicable disability criteria.
- The trust must be irrevocable.
- The trust must contain provisions addressing Medicaid reimbursement after the beneficiary’s death or termination of the trust.
The reimbursement requirement is particularly important because it means that if assets remain after the beneficiary dies, Medicaid typically must be reimbursed before the remaining property can pass to other permissible recipients.
How Does a Third-Party Special Needs Trust Differ?
A third-party SNT is often the more relevant planning tool when a parent, grandparent, or another family member is proactively creating an estate plan for a person with special needs. As the name suggests, the trust is funded with assets belonging to someone other than the beneficiary. For example, you might create a third-party SNT for your daughter and direct that her share of your estate pass into the trust instead of being distributed directly to her. Grandparents and other relatives can also structure gifts or inheritances so that property passes to an appropriately designed trust rather than outright to the individual.
One of the most significant differences between first-party and third-party SNTs involves what happens at the beneficiary’s death. A properly structured third-party SNT does not have the same Medicaid payback requirement that applies to a first-party SNT. As such, you can designate remainder beneficiaries who receive property left in the trust after the beneficiary dies. For parents, this distinction can be extremely valuable because it allows assets to benefit a child with special needs during the child’s lifetime while potentially preserving remaining property for siblings, grandchildren, or other beneficiaries afterward.
A Special Needs Trust Can Be Created During Life or Through Your Estate Plan
An inter vivos trust, commonly referred to as a “living” trust, is established during the Settlor’s (creator’s) lifetime. A testamentary trust, by contrast, is created through a Last Will and Testament and becomes funded after death. A third-party SNT may be established during your lifetime so that it exists and is available to receive assets before your death. Depending on its structure, family members may then be able to coordinate future gifts with the existing trust. Alternatively, special needs provisions can be incorporated into an estate plan so that the trust is funded upon death.
What Are Eligible Expenses for a Special Needs Trust?
In any trust, the Trustee’s responsibility is to use trust assets in accordance with the trust agreement and for the benefit of the beneficiaries. With a SNT, the Trustee must also understand and consider how a particular distribution could affect benefits received by the beneficiary because SSI, Medicaid, housing assistance, and other programs do not necessarily treat every distribution in the same manner. Typically, SNT assets may be used for expenses that improve the beneficiary’s quality of life, including things such as education, transportation, recreation, and travel as well as computers and electronics, specialized equipment, therapy, and other supplemental needs.
Selecting the Right Trustee Is Critical
Creating the trust agreement is only part of the planning process. You must also appoint a Trustee to administer it, potentially for decades. The Trustee manages trust assets, makes distribution decisions, handles financial obligations, and administers the trust according to the terms you create. An SNT Trustee also needs to understand the beneficiary’s circumstances and the public benefits involved, which makes selecting a Trustee considerably more complicated than simply naming the relative you trust most.
A sibling may know the beneficiary exceptionally well but have little understanding of SSI or Medicaid while another family member may be financially sophisticated but lack the time necessary to administer a trust involving extensive medical, housing, or support needs.
Should You Consider a Professional Trustee?
For some families, a professional Trustee may be appropriate. Professional fiduciaries can provide experience with trust administration, investment management, recordkeeping, compliance, and distribution procedures. A neutral Trustee may also reduce family conflict when siblings or other relatives disagree about how money should be managed or spent. Keep in mind, however, that a professional Trustee may not possess the intimate knowledge of the beneficiary that a close relative has. One solution may be a structure that combines professional expertise with family involvement by appointing Co-Trustees.
A Pooled Special Needs Trust May Provide Another Option
A pooled SNT can offer an alternative to establishing and administering a completely separate trust. A pooled trust is administered by a nonprofit organization and allows individual beneficiaries to maintain separate accounts, while assets are pooled for investment and management purposes. This arrangement can be useful when the amount available for a beneficiary does not make an individually managed trust practical or when the family wants access to experienced trust administration without independently hiring a Trustee. Pooled trusts have their own governing agreements, enrollment requirements, administrative procedures, fees, and remainder provisions. Consequently, participation should be evaluated carefully rather than assuming that every pooled trust offers identical terms.
Do You Have Questions About Creating a Special Needs Trust in New York?
For more information, please join us for a FREE estate planning seminar. If you have additional questions or concerns about a Special Needs Trust in New York, contact the Long Island special needs planning attorneys at Eghrari Law Firm by calling us at 631-265-0599 to schedule your appointment.
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