How a Special Needs Trust Can Help You

Most people are familiar with Harry Potter.  Because special needs trusts can be confusing, we rely upon our wizarding friend, Harry, to help explain these planning tools.  A special needs trust operates like an invisibility cloak.  Just as Harry could not be seen while wearing the cloak, a special needs trust hides all of the money/property that it holds.  What is the benefit of making this money/property invisible?  The shielding powers of a special needs trust enable individuals with disabilities to meet low financial eligibility limits for state and federal public benefit programs. 

For example, Supplemental Security Income (SSI) is a monthly cash benefit of up to $783/month (as of January 2020) that individuals with disabilities can use toward their monthly expenses.  In order to qualify for SSI, an individual cannot have more than $2,000 in his or her name.  If Harry had a disability and applied for SSI with $30,000 in a regular checking account, his application would be denied because he has more than $2,000.  However, if Harry cloaked his $30,000 in a special needs trust, then he would meet the financial eligibility rules for SSI. 

Similarly, many people with disabilities would benefit from services provided by Medicaid.  These services may include residential supports, a job coach, therapeutic supports, and more.  Like SSI, Medicaid has low income and asset rules.  Therefore, special needs trusts help individuals to meet low financial limits without having to “spend down.”  So, now that we understand why an individual would use a special needs trust, let’s turn our attention to understanding what special needs trusts are, and how they are used. 

There are three types of special needs trusts.  While there are some differences between the trusts, there are two main things that they all have in common. 

First, all types of special needs trusts wear Harry’s invisibility cloak, making the money inside invisible when applying for public benefit programs, such as SSI, Medicaid, Rental Assistance, etcetera.  Second, there is a Trustee who controls the funds in the trust for the benefit of an individual with a disability.  Keeping with our mystical theme, the Trustee is like a castle gatekeeper.  Just as a gatekeeper decides who comes and goes, the Trustee has the sole authority to either use the trust funds or to continue holding them in the trust.  No one can force the gatekeeper Trustee to spend or hold trust funds—the Trustee’s authority is absolute. 

While all special needs trusts share common features, there are also important differences between the trusts.

A First Party Special Needs Trust holds money/property that belongs to the individual with a disability.  For example, if Harry had a disability, the money in the trust could hold money that he has in the bank; any inheritance received from his parents; settlement proceeds; wages earned; etcetera.  In addition to holding only Harry’s money/property, there are also rules regarding who can benefit from the trust.  The person with a disability must be the primary beneficiary of his or her First Party Special Needs Trust.  This means that the Trustee must use the funds in Harry’s trust for Harry’s primary benefit.  Lastly, it’s important to understand what happens if there is money remaining in the trust when Harry dies.  At his death, any money remaining in the trust would be paid back to the State for any Medicaid assistance that Harry received during his lifetime.  If there is anything remaining after the State is paid back, that money can go to other individuals who are named as remainder beneficiaries of the trust.

Now, what about a Pooled Trust? A Pooled Trust is most typically used for individuals with disabilities over age 65—however, it can be used for younger individuals as well.  If an individual with a disability is over the age of 65, a Pooled Trust is the only type of special needs trust that the individual can use to protect his or her own money/property.  So, if Harry, in his old age, needed to make his own money invisible to access public benefits, he could not set up a First Party Special Needs Trust.  Instead, a Pooled Trust would be his only option.  Individuals with disabilities under age 65 can set up either a First Party Special Needs Trust or a Pooled Trust.  The Trustee, or castle gatekeeper, of a Pooled Trust established in Connecticut is a non-profit organization known as PLAN of CT.  PLAN of CT has the sole authority to say yes or no to distributions from the trust.  In addition, the trust must be used for the primary benefit of the individual with a disability, just like a First Party Special Needs Trust.  Also similar to a First Party Special Needs Trust, any money remaining in the trust upon Harry’s death is paid either to the State of Connecticut as reimbursement for his lifetime Medicaid expenses, or to PLAN of CT’s charitable organization. 

Last but not least, a Third Party Supplemental (a.k.a. Special) Needs Trust holds the money/property of anybody except the individual with a disability.  This means that Harry’s money cannot be deposited into a Third Party Supplemental Needs Trust.  The most common use of a Third Party Supplemental Needs Trust is to hold the inheritance of an individual with a disability.  For example, before they died, Harry’s parents should have created Wills leaving Harry’s inheritance to the Trustee of his Third Party Supplemental Needs Trust.  The trust could have been set forth in their Wills, which would mean that the Trustee would need to report to the Court as to how the funds are used.  Alternatively, Harry’s parents could have established the trust outside of their Wills as a stand-alone document, which would mean that the Court would not have oversight of the trust.  In addition to holding Harry’s inheritance, other third parties—like Dumbledore or Hagrid—could also contribute funds to a Third Party Supplemental Needs Trust for Harry’s benefit.  Unlike a First Party Special Needs Trust or a Pooled Trust, when Harry passes away, any money remaining in the trust goes directly to other named beneficiaries (i.e. children, siblings, charity, etc.)—the state is not paid back for any Medicaid assistance provided to Harry during his lifetime.

As you can see, special needs trusts are powerful planning tools.  Hopefully, you now have a better sense as to how “Harry’s invisibility cloak” can help you!

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