The problem for many needs-based beneficiaries is that they might inherit assets (or otherwise come into ownership of significant assets) which will make them lose their benefits. If you have an heir or other possible beneficiary of your assets, who has a disability, you need to plan to ensure that person does not lose valuable government benefits. Sometimes an intended beneficiary of your Estate Planning may not be receiving benefits now, but might in the future. You can have a trust designed for this as well.
There are different types of Special Needs Trusts. Sometimes the disabled individual has funds of his own and so is ineligible for needs-based benefits. Under Federal Law a trust can be established for the individual by his parents, grandparents, a court, or a guardian, and his own money can be moved to the trust. The funds in the trust then become “non-countable” for benefits eligibility, and the individual can usually get benefits right away. This is called a “self-settled” or “first-party” trust. A draw-back to this type of trust, is that to meet the Federal regulations it must have a “pay-back” provision that allows the government to get any funds left in the trust when the beneficiary dies, to pay-back for Medicaid benefits received during the life of the disabled individual.
If the individual is in the situation where his own funds need to go into a trust, but he does not have a parent, grandparent or guardian to establish a trust, then another type of trust called a “pooled-trust” is available. This type of trust is usually established by a charitable organization and there is a company or group that manages the funds. The individual will receive the same type of benefits as with a personal trust, but when the beneficiary dies some of the left-over assets will go to the charity instead of the government.
A special needs trust funded by someone other than the beneficiary does not need a “pay-back” provision. This is usually called a “third-party” trust. Any funds leftover after the primary beneficiary dies, can go to other chosen beneficiaries. These are often the other children (or grandchildren) of the person who created the trust.
Special needs trusts can be beneficial to disabled individuals and their families. They can be very complicated, and must be drafted and used correctly. The choice of the proper terms, and the choice of the right trustee, are critical. Tax consequences, income, gift and estate, should be considered, and the proper type of trust must be used. If you have a disabled family member, you should discuss your planning with a lawyer who is experienced in this area, and understands special needs trusts.