There are two types of Special Needs Trusts (SNTs), commonly known as first-party or self-settled and third-party SNTs. It is important to determine which type of SNT you have or need. This depends upon whose property is funding the SNT. If the property funding the SNT originates with the SNT beneficiary, then it is a first-party SNT. However, if the property funding the SNT always belonged to someone other than the SNT beneficiary, then it must be drafted as a third-party SNT.
Third-Party Special Needs Trusts
Third-party SNTs are used by individuals planning in advance for a loved one with special needs. The parents, grandparents, siblings, or any other person other than the beneficiary may establish a SNT for an individual with disabilities or special needs. The person(s) establishing the trust is known as the grantor, settlor, or trustor. Third-party SNTs can be included in a Last Will and Testament, established within a Living Trust, drafted as a stand-alone SNT or utilize a community or pooled SNT. These SNTs are typically funded upon the death of the beneficiary’s parents, grandparents, sibling or the other individual(s) who established the SNT.
SNTs created under a Will or within a Living Trust are not funded until after the death of the individual whose Will or Living Trust created the SNT. A stand-alone SNT or community/pooled SNT may be more useful if there are multiple donors who wish to fund the SNT. A stand-alone or community/pooled SNT exists during the lifetime of the person establishing the SNT, which allows the SNT to receive gifts from grandparents, siblings, friends or even from the person establishing the SNT, prior to the death of the SNT’s creator.
A third-party SNT does not have to be irrevocable in order to preserve the eligibility of the SNT beneficiary for means-tested public benefits. However, if the SNT beneficiary has the power to revoke the SNT, the SNT assets would be considered an available resource for Supplemental Security Income (SSI) and Medicaid purposes. The beneficiary’s ability to exercise control over the SNT may render the beneficiary ineligible to receive public benefits that have an income or asset limit. The SNT beneficiary shall have no vested interest. The SNT agreement should authorize the person establishing the third-party SNT, the trustee, and/or trust protector to amend the SNT to address administrative changes in the law or the circumstances of the beneficiary. Allowing for such amendments helps ensure that means-tested government benefits are preserved if an agency should challenge the terms of the SNT.
Upon the beneficiary’s death, the third-party SNT is not required to reimburse any state(s) for the Medicaid benefits received by the beneficiary during his or her lifetime if there are any funds remaining. The grantor, settlor, or trustor remains in full control of where all the remaining SNT assets will go upon the beneficiary’s death.
First-Party Special Needs Trusts
First-party SNTs are used when a person with disabilities inherits property outright, receives a personal injury settlement, or back pay from Social Security. These SNTs also are useful when a person without a prior disability owns assets in his or her name, later becomes disabled, and thereafter needs to qualify for public benefits that have an income or asset limitation. Federal law, specifically first-party SNTs are authorized under 42 U.S.C. § 1396p(d)(4)(A) and pooled first-party SNTs are authorized under 42 U.S.C. § 1396p(d)(4)(C). First-party SNTs also are commonly called self-settled SNTs, Medicaid payback trusts, OBRA ’93 trusts, and d4A or d4C trusts.
An individual first-party SNT can be established by the SNT beneficiary’s parent, grandparent, legal guardian, or a court, or by the mentally and legally competent SNT beneficiary. A first-party SNT is funded with property that belongs to the beneficiary, or to which the beneficiary is or becomes legally entitled. Property in a first-party SNT can only be used for the “sole benefit” of that beneficiary. Individual first-party SNTs may be created and funded only for individuals who meet the government’s definition of “disabled” and are under sixty-five years of age when the SNT is established and funded.
All first-party SNTs must specify that after the beneficiary’s death, all amounts remaining in the SNT, up to an amount equal to the total lifetime medical assistance benefits paid on behalf of the beneficiary by the Medicaid program(s) of any state(s), are first repaid to those state Medicaid program(s), even to the extent of fully exhausting the remaining SNT assets. Only after this Medicaid payback may any remaining balance be distributed to remainder beneficiaries.
Pooled Special Needs Trusts
Pooled SNT programs can be used to establish both first-party and third-party SNTs. Pooled SNTs are established and administered by a non-profit association for the benefit of multiple beneficiaries. Pooled first-party SNTs can be established by the beneficiary if mentally and legally competent, a beneficiary’s parent, grandparent, guardian, legal representative, or a court. A pooled first-party SNT can be established by individuals over sixty-five years of age in Wisconsin without penalty. Prairie Trust, a division of Waukesha State Bank is currently serving as trustee of the Life Navigators, Inc. pooled trust program.
Pooled SNT programs have the following features:
- A separate account is maintained for each individual beneficiary of the pooled SNT, but the administrator may pool the assets of all accounts for purposes of investment management.
- A master trust agreement governs the separate accounts of all SNT beneficiaries.
- An account with the pooled SNT is established for the sole benefit of an individual with disabilities by the parent, grandparent, or legal guardian of the individual, by the individual personally, or by a court. The beneficiary of a first-party account must meet the government’s definition of “disabled.”
- For first-party accounts with pooled SNTs in all states any assets remaining in the beneficiary’s separate account upon his or her death, to the extent not retained by the pooled SNT, first must be used to reimburse the Medicaid program(s) of any state(s) that has provided medical assistance for the beneficiary. However, a state is not entitled to receive more than the amount remaining in the beneficiary’s separate account, even if the amount owed to the state is greater than the amount remaining in the deceased beneficiary’s separate account.
Both third-party and first-party SNTs must be properly drafted in order to protect a beneficiary’s right to receive means-tested public benefits. It is important to discuss which type of SNT should be used in your specific situation with an attorney who is proficient in special needs planning. If you should have any questions, please feel free to reach out to Nancy K. Schoenberg, Vice-President and Senior Trust Administrator at email@example.com or 262-953-2438 or Autumn Carbonell, Senior Personal Trust Assistant at firstname.lastname@example.org or 262-953-2440.