If you or a loved one has special needs, it can be challenging to find the right resources to live a quality life. Thankfully, special needs trusts (SNTs) can provide much-needed assistance to government benefits. As with any trust, there are rules about how you can set up these types of trusts and spend assets. Let’s look at the some rules for special needs trusts and find out how opening a special needs trust can help a special needs loved one live a better life.

Special Needs Trusts vs General Needs Trust in NC

It is important to understand how a General Needs Trust is different from a Special Needs Trust or Supplemental Needs Trust.  

Third Party Supplemental Needs Trust

A Third Party Supplemental Needs Trust is a type of Special Needs Trust (SNT) that provides a source of benefits for the disabled individual who also wants to qualify for need-based government benefits. Need-based government programs do not count this type of trust as income for a disabled individual. With a Supplemental Needs Trust, which is usually set up by loved ones of the disabled person, it is easier to be eligible for crucial benefits such as transportation, health insurance, and housing from government sources.  There is no requirement to pay the remaining assets to Medicaid at the death of the beneficiary, and it enables the beneficiary to live at a higher standard of living than other similarly situated people who don’t have a Supplemental Needs Trust. 

First Party Special Needs Trust

A First Party Special Needs Trust is usually funded with assets a person has already received or is legally entitled to, meaning it is funded with the beneficiary’s own money.  Similar to a Third Party Supplemental Needs Trust, this type of trust protects a beneficiary’s assets from being counted against them for purposes of qualifying for means-tested government benefits, such as SSI or Medicaid.  This is usually created when a beneficiary receives an injury settlement or inheritance from loved ones that did not plan around the beneficiary’s public assistance eligibility, and is often created by a Court or legal guardian of a person with special needs.  These trusts have a huge tradeoff of requiring any unspent funds to be first used to reimburse Medicaid at the death of the beneficiary, but during the life of the beneficiary, the use of a trust like this enables the beneficiary to have some of the benefits of more assets without losing government benefits.

General Needs Trust

A General Needs Trust is a trust set up for beneficiaries that usually are not able to handle their own assets, whether it is because they are disabled, minors, or just irresponsible.  Often, there is a standard of support, meaning there are requirements to pay money to or for the beneficiary according to the beneficiary’s needs or wants. This makes the assets in the trust exposed to being counted against the beneficiary for means-tested benefits and should really only be used if there is not a concern about means-tested government benefits being lost later. 

Special Needs Trust Spending Rules

When an experienced special needs trust attorney draws up the trust, the trustee may use trust funds for a wide variety of services and products that improve the quality of life of a special needs individual. Attorneys experienced in this area understand the legal language needed to help broaden the uses available to the disabled individual for spending on their needs.

As a differently-abled or disabled individual, you need to care for your immediate needs, such as medical, eyesight, dental, living arrangements, etc. However, once you’ve taken care of your basic needs, your SNT can fund your quality of life options. These items can include various services and products, including hiring a personal assistant or refitting your home. 

There are other everyday things an SNT commonly disburses funds for, such as:

  • Vocational and recreational activities
  • Vacations and hobbies
  • Opportunities for training and education
  • Any communication equipment needed
  • Professional services required by the beneficiary, such as claims processors, accountants, attorneys, and more
  • A service animal or pet for the beneficiary

Many of the disbursements received from an SNT are permissible if carefully crafted. The trust documents need to show that the beneficiary derives the primary benefit.

New Rules for First Party Special Needs Trusts

If you fund a trust with your own money or assets, it’s called a self-settled trust. Other names include self-settled, first party special needs trust, and d4a special needs trusts.  The last name is a reference to the section of a federal statute that speaks to this type of trust.

This type of trust is subject to more governmental regulations than a trust funded by 3rd party funds. There are rules about when you can open a self-settled special needs trust and what happens to the assets when you pass away.

However, an older rule mandated that disabled individuals could not open or draw up a self-settled trust themselves. They had to rely on a parent or grandparent or go to court to gain the right to open a self-settled trust for themselves as beneficiary. However, that rule no longer exists.

The Special Needs Trust Fairness Act of 2016 established the new rule. The section “Fairness in Medicaid Supplemental Needs Trusts,” added the words “the individual” to the list of those permitted to act as the grantor to establish the trust. (1)

With a self-settled special needs trust:

  • You must be under age 65 when establishing the trust
  • Social Security must define you as “disabled.”
  • You must be unable to earn any substantial income (if you do work and earn a considerable income, you lose your disability eligibility with Social Security)

In addition, when you die, the government can send a bill to your estate to collect the cost of your care while you were living! For the self-settled special needs trust, the trust must designate the state as the primary beneficiary so they can be reimbursed for expenses they paid in the form of government benefits. In other words, a self-settled trust may not leave much or anything at all behind for any heirs.

3rd Party Funded Trusts Offer More

However, when a 3rd party, such as a parent or aunt, funds a trust for you, there is:

  • No age limit
  • No need to qualify as disabled through Social Security to receive distributions as the beneficiary
  • You don’t need to worry about losing all of the money in the trust to the State of North Carolina after you die.

There is a reason why most families with a disabled or special needs individual choose to open a 3rd party special needs trust. However, every situation is unique. Discussing the precise details of your assets and needs can help an experienced special needs trust attorney write up the best type of trust for you and your family’s needs.

Summing Up

A special needs trust can help maximize family assets as the disabled individual can often qualify for government benefits and meet additional needs through their special needs trust. Even if your family has enough to manage helping a disabled family member in totality, a trust can still be helpful. A trust can administer money as needed to a family member who should not manage their own finances.

In addition, if you set up a 3rd Party Supplemental Special Needs Trust for a young person, they can easily apply for governmental benefits later if needed.

We Can Help

At Hopler, Wilms, and Hanna, our special needs trust attorneys have years of experience helping families with special needs members. We can help you determine if a special needs trust is suitable for your family and then work with you to set it up correctly. Give us a call or contact us online today to schedule an appointment.

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