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Special Needs Trusts

Special Needs Trust

A trust is a type of fiduciary arrangement that is formed between three parties: a settlor, a trustee, and one or more beneficiaries. In general, the purpose of a trust is to provide legal protection over the contents held within the trust (usually monetary funds or assets). However, there are many different kinds of trusts and each one has separate rules that must be followed or else it could invalidate the trust. 

In particular, a special needs trust may be created when an individual wants to provide supplemental income for a person who has a mental or physical disability, without limiting their ability to receive government benefits (e.g., Medicaid). In other words, a special needs trust will permit a disabled person to receive both the extra income from the trust and their government benefits. 

The reason why a special needs trust allows them to collect both is because its rules waive the standard requirement to reduce or eliminate the amount of government benefits when someone inherits or is given a monetary gift. This restriction does not apply to a special needs trust.

There are many advantages to setting-up a special needs trust for a disabled family member. Thus, if you are interested in learning more about special needs trusts and need assistance in forming one, you should consult a local real estate lawyer for further guidance. 

Court-Ordered Special Needs Trust

A standard special needs trust is a specific type of trust that is set up for a person who has special needs or is disabled. These trusts are usually set up by their parents, often to provide for a special needs child after their parents have passed away. Another goal is to transfer funds or property to the person without disqualifying them from receiving various types of government benefits such as Medicaid.

Special needs trusts can be used for other situations and to serve other goals. Usually they help provide supplemental care beyond what government agencies and programs may provide.

A court-ordered special needs trust is one that, as its name suggests, is ordered by a court exclusively in situations in which a person who has special needs or is disabled has inherited assets or been awarded damages or a settlement as a result of a court proceeding, e.g. the trial of a personal injury lawsuit. Again, one of the main goals is the same as for a regular special needs trust, that is, to permit the beneficiary to continue to receive public benefits.

These types of assets cannot be put into standard special needs trusts. Instead, a court-ordered special needs trust, also called a “Type A” special needs trust, must be established. Laws regarding the requirements and procedures for setting up and maintaining a court-ordered special needs trust vary from state to state. There is also federal law on the topic.

Generally, however, after the court establishes the trust by its order, the person subject to the order must obtain a Tax Identification Number (or EIN) for the trust. The person then needs to set up bank accounts for the trust assets, file an inventory and appraisal of the assets with the court and submit regular accountings to the court. The trust remains in existence until the assets are used up or the beneficiary passes away. Once the beneficiary has passed away, any funds that remain in the trust are paid to the state for any medical assistance provided after the trust's establishment.

Setting Up a Court-Ordered Special Needs Trust

A court-ordered special needs trust is initiated when a court issues an order with instructions to establish such a trust. A court-ordered special needs trust would need to be formally created by an experienced trust lawyer on behalf of the disabled person. The lawyer drafts the documentation that establishes the trust. Unlike other types of trusts, only certain qualified parties are authorized to obtain this service, including:

  • Parents of the disabled person; in some instances, a grandparent can also set one up;
  • Legal guardians of the person; and
  • The court itself.

Also, the disabled person must meet various requirements. These may include certain Social Security standards; they must also be under 65 years of age, and must have a legally recognized disability that qualifies them to be the beneficiary of a Type A trust according to the requirements of the law.

Generally, a person who is entrusted by the court with the duty to set up this type of trust would use the services of an experienced trust lawyer who knows how to set up and service court-ordered special needs trusts.

Special Needs Trusts Funds

Special needs trust may be funded in a variety of ways. This may include funds inherited from a will, monetary gifts from relatives or friends that are deposited directly into the trust, or by survivorship life insurance policies. 

Regardless of where the funds or property comes from, the important thing to remember here is that no assets may be given directly to the beneficiary. Instead, they must be deposited straight into the trust.  

Additionally, it should also be noted that a special needs trust will typically terminate once a beneficiary passes away or the money runs out. If there are any funds remaining after a beneficiary dies, they must be used to reimburse the government for medical assistance.

“Letter of Intent” for a Special Needs Trust

Although it is not necessary to draft a “Letter of Intent” for a special needs trust, it is strongly recommended. A letter of intent informs parties to the trust, other family members, and friends about the provisions of the trust and how it should be used for the beneficiary.  

This document also provides instructions for how to take care of the beneficiary when their primary caregiver (i.e., the settlor) is no longer able to or alive. Some details that are commonly included in these letters are financial instructions for how to distribute the trust funds, general information about the beneficiary (e.g., hobbies, skills, abilities, etc.), their medical history, and important contacts in case of an emergency.

Benefits of Special Needs Trusts

As previously mentioned, there are several advantages to setting up a special needs trust. One of the main benefits that a special needs trust offers is that the trust property will be under the care of a person who is legally and mentally competent to manage the assets (i.e., a trustee).  

The reason why this is such an important advantage is because in many cases a disabled beneficiary will not be capable of handling their affairs on their own. By securing the property in the care of a trustee, however, the settlor and beneficiary can rest assured that the trust property will be handled in a sound and reasonable manner. In fact, a trustee is legally obligated to use “sound judgment” when managing the contents of a trust. 

Some other advantages of a special needs trust include: 

  • It enables a beneficiary to keep their eligibility status, so they can continue collecting government benefits along with the income from the trust.
  • The trust property cannot be accessed by creditors or used to pay off judgments. It is strictly distributed to care for the beneficiary and to provide for their needs.
  • It provides a couple of favorable tax incentives, such as tax write-offs.
  • Property placed in a special needs trust is less likely to be subjected to waste or improper spending issues. 

On the other hand, there are also some disadvantages to using a special needs trust. These include:

  • The beneficiary is obligated to request funds from the trustee who has complete discretion over whether to give it to them or not. In other words, beneficiaries under this arrangement have almost no control over the trust property.
  • The costs to set up and manage a special needs trust are very high. 
  • Certain trust funds trust must be used to pay back Medicaid expenses.  

When are Special Needs Trusts Used?

As discussed above, a special needs trust is specifically used to care for an individual who has a mental or physical disability. Thus, the primary situation in which a special needs trust is used is when a parent or loved one wants to ensure that the beneficiary will be able to support themselves in the event of their death or incapacitation. 

One other scenario where a special needs trust may be used is when a beneficiary receives funds from an inheritance provision in a will or proceeds that stem from a personal injury lawsuit.

Since their uses are so limited, a special needs trust will often include specific instructions on the purpose of the trust and how parties may terminate its existence.

Supplemental Needs Trust

Although the two terms are often used interchangeably, a supplemental needs trust is slightly different from a special needs trust in the following ways:

    • For one, a special needs trust is funded by assets owned by the beneficiary (e.g., inheritance). In contrast, the assets in a supplemental needs trust are owned by a third party who specifically set aside a portion of money to provide income for a beneficiary.
    • Second, there are no age limits on a supplemental needs trust. The only exception is if after the age of 64 the beneficiary enters a long-term care facility. With a special needs trust, there are age limits. Specifically, the special needs trust must be created and funded before a beneficiary turns 65 years old. Once they turn 65, no additional funds may be added to the trust.
  • Lastly, if there are leftover funds in a special needs trust when a beneficiary dies, the government will require the trust to reimburse any expenses covered by Medicaid benefits over the course of their lifetime. In contrast, the government does not require that a supplemental needs trust repay them for medical assistance. 

Other Aspects of a Court-Ordered Special Needs Trust

It is important to note that upon the death of a person who has special needs or is disabled, any funds that remain in a court-ordered trust are paid over to the government of the person's state of residence. The exact amount of funds that are paid to the state is based on the amount of medical assistance they received from the government during their lifetime.

Court-ordered special needs trusts are generally subject to more restrictions and requirements for legal monitoring than are an ordinary special needs trust. This is due to the fact that the trust is set up at the direction of the court and the funds under management have been put in the trust because of a court proceeding, often either the probate of a will or a trial in which the beneficiary was awarded damages or a settlement.

More personal transfers of funds may require a different type of special needs trust to be created. Alternatively, different financial tools may also be employed, such as a specific type of will or other estate planning devices.

How Can A Lawyer Help Me With Special Needs Trusts?

If you have questions or need assistance with a special needs trust, it may be in your best interest to contact a special needs lawyer for further guidance. A special needs lawyer can ensure that the trust document contains all the proper language, which in turn, will certify that the trust is valid and legally enforceable. 

A qualified special needs lawyer will also thoroughly understand the requirements of a special needs trust and will already be familiar with the unique trust laws that apply. 

Alternatively, you can also contact a local trust lawyer for assistance. An experienced trust lawyer can help you draft, edit, and review all of the complicated trust documents and can set up the trust. Also, if you want to draft a letter of intent to hand out to certain individuals, your attorney will be able to help you with this task as well. 

Finally, if you are being sued or need to file a lawsuit concerning a dispute over the trust, your attorney can aid you in preparing and filing court submissions, and can provide representation on your behalf in court.