A special needs trust is a trust designed for beneficiaries who are disabled, either physically or mentally. Often, individuals with disabilities are on public benefits. When on public benefits, disabled persons are usually subject to specific asset limits. If a disabled person exceeds the applicable asset limits, then he or she may lose public benefits until he or she is again under those asset limits. Additionally, the assets of the disabled person may be subject to estate recovery after he or she passes away.
Contrary to public belief, it is not necessary to disinherit a disabled beneficiary. If you are someone who desires to leave a portion of your estate to a disabled person, you should strongly consider creating a special needs trust for that beneficiary. An individual may still include a disabled beneficiary in his or her estate plan by leaving the assets intended for the disabled beneficiary to a special needs trust instead. When an individual creates a special needs trust for a disabled beneficiary and funds with it assets that do not belong to the beneficiary, that is called a third party special needs trust.
Assets in a third party special needs trust are managed by a trustee–that is someone other than the disabled beneficiary. The trustee may generally use assets in a third party special needs trust to pay for things on behalf of the disabled beneficiary that public assistance would not cover. The two primary benefits of a third party special needs trust include: 1) the assets in a third party special needs trust do not count against the asset limits of the disabled beneficiary, so the disabled beneficiary should not lose his or her public benefits; and 2) if there are any assets left in the third party special needs trust upon the death of the disabled beneficiary, those assets are not subject to estate recovery.
Unfortunately, disabled beneficiaries are not always left assets in a third party special needs trust. More often than not, disabled beneficiaries are left assets directly. As noted above, when that happens, the disabled beneficiary may lose his or her public benefits until the assets are again reduced to allowable limits. If this occurs, the disabled beneficiary may consider having a first party special needs trust established.
Although assets in a first party special needs trust are still managed by a trustee, such assets will not count against the asset limits of the disabled beneficiary. The most significant disadvantage of a first party special needs trust, however, is that such trusts are subject to significant scrutiny by the Social Security Administration. Also, depending upon whether the disabled beneficiary has sufficient capacity, a first party special needs trust may need to be established by a Court. Finally, any assets in a first party special needs trust will be subject to estate recovery after the death of the disabled beneficiary.
If you are at all interested in discussing the use of a special needs trust for any reason, then please contact Sturgul and Long to schedule a consultation today.