What is a Special Needs Trust?
Special needs trusts are simply a particular type of trust. There are many situations where trusts are valuable, as they allow the Grantor to control the trust assets even when the Grantor has lost the ability to manage their affairs or has died.
Basically, a trust is a legal arrangement where:
a Grantor creates, and provides assets to fund, the trust,
the Trustee manages the assets of the trust
for the benefit of the Beneficiary
Special Needs Trusts are created specifically for one purpose: to help a person with special needs enjoy a better quality of life without losing their “means tested” government benefits such as “regular” Medicaid and SSI.
These “means tested” benefits are only provided to people who are disabled, have low assets and low income. If a person got a large cash gift from a trust, they would have to give up Medicaid and SSI, because they would no longer meet the low income and asset requirements for means tested benefits.
Of course, if the gift is large enough, the Beneficiary would not need government benefits or a special needs trust at all. But this is very rare given the cost of many needed services and the value of government benefits over the lifetime of the Beneficiary.
Special Needs Trusts are drafted by skilled attorneys, using very particular rules. These rules keep the trust property under the control of the Trustee, not the Beneficiary. Just as importantly, these particular trusts need to be managed by the Trustee with extreme care, carefully following the rules set forth in the trust. By using and following these Special rules, the trust assets are not counted against the Beneficiary and do not impact government benefits.
A Special Needs Trust cannot provide the Beneficiary with basics such as housing or groceries, or government benefits would be lost. These trusts can, however, provide many “extras” that greatly enhance the Beneficiary’s quality of life. (These extras are often called “amenities” and for this reason Special Needs Trusts are often called “amenities” trusts.) These extras can include things like furniture and appliances, non-food items such as linens, shampoo and dish soap, pets and pet supplies, glasses, haircuts, repair services, health club memberships, musical instruments, computers, classes, vacations, and cable TV or internet service.
There are three main types of Special Needs Trusts.
Third party: Grantor is a third party, often a parent or grandparent. The Grantor decides, when creating the trust, what happens to the remaining assets in the trust when the Beneficiary dies; there is no government reimbursement.
First party: Grantor is the Beneficiary, funded with the Beneficiary’s assets- such as an accident settlement or an inheritance. While the Beneficiary is living, the funds in the trust are used for his or her benefit. When the Beneficiary dies, the remaining trust assets are used to reimburse the government for the cost of any benefits paid over the Beneficiary’s lifetime. Any amounts left over, if any, are distributed as the Grantor (Beneficiary) decided in creating the trust.
Pooled Trusts: Only an approved non-profit organization can create and set up a Pooled Trust. The Pooled Trust pools the assets from many beneficiaries for investment advantages, for lower administrative costs. But each Beneficiary has his or her own sub-account account. That sub-account can be funded by the Beneficiary and/or by some specified others. When a Beneficiary dies, excess funds are usually kept in the larger trust pool to benefit other beneficiaries, depending on the joinder agreement.
Currently, these nonprofits have set up Pooled Trusts in Michigan:
The three types of special needs trusts (SNTs) have different characteristics and are very different from ABLE Accounts. Here is a chart which explains many of the differences.
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