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Special Needs Trust Explained

What is a Special Needs Trust

A Special Needs Trust is an arrangement where you leave money with a person or a company you trust who then uses the money to pay for your or your loved one’s needs.

For the trust to work and qualify you for Medicaid and SSI, this Trustee cannot give the money directly to you or your loved one. Rather, they will use the Trust to pay bills. As an example, think of it as a parent who pays for a child’s needs.

This arrangement is only allowed for someone who is disabled.

What Kind of Special Needs Trust is Right for Me

There are three basic types of Supplemental Needs Trusts:

If You’re Under 65: You can use your own money to make a First Party Special Needs Trust.

If You’re Over 65: You can use your own money to make a Pooled Special Needs Trust.

Regardless of Age: You can make a Third-Party Special Needs Trust for a disabled relative or a friend.

The tree types of Special Needs Trusts are discussed below. As a rule of thumb, you’d always try to go for the trust with the least amount of restrictions.

First Party Special Needs Trust

If you are disabled and under the age of 65, you may qualify for a First Party Special Needs Trust.

The catch: With this trust, there is a catch – any money left over after you die will have to be paid back to Medicaid. The trust should contain a Medicaid payback provision. But since you will qualify for Medicaid during your lifetime while having the trust pay for your other needs, a First Party Special Needs Trust is still a great arrangement.

Even though it’s your money, the Special Needs Trust has to be created by your parent, grandparent or legal guardian. Or, if your parents are no longer alive and you don’t have a legal guardian, you submit documents to the Court to ask a Judge to create a trust for you.

When the Trust is formed by one of your relatives listed above, you will have a big say in who will be the Trustee selected to manage the money. When the trust is created by the Court, you will also have some say in who is the trustee. You can have a family or friend or a professional adviser manage it, and there are also companies that manage trusts professionally, their fees typically being around 1.25% per year.

We’ve seen First Party Special Needs Trusts being formed with money from a court settlement, inheritance, or just money that someone had before they realized that they qualify to have the trust pay for their needs and still receive Medicaid and SSI.

Charity Managed Special Needs Trust

Once you turn 65, you no longer qualify for a Special Needs Trust that’s managed by your relative or a friend or a trust management company. However, you may still qualify for a Charity Managed Special Needs Trust, where the trust is managed by a Medicaid-approved charity.

The catch: The catch with this trust is that any money left over after your death will remain with the charity. Also, the charity’s management fees are typically higher than the fees you’d get at a trust company’s, and obviously higher than having a relative or friend manage the trust for free. But for someone over the age of 65, a Pooled SNT does a great job paying for their needs while preserving their eligibility for Medicaid.

The Charity Special Needs Trust works to shield both assets and income from disqualifying you from Medicaid. Instead of assets and income being on your name, they go into the trust, with the trust using the assets and income to pay your bills.

This kind of trust is usually called a “Pooled Special Needs Trust,” but I think that calling it a “Charity Special Needs Trust” makes it easier to distinguished from the first type of trust we’ve discussed.

Third-Party Special Needs Trust

If you’re setting up a Special Needs Trust for your disabled relative, it will be a Third-Party Special Needs Trust. Those trusts work to have a trustee (a person or organization you trust) use that money to care for your disabled relative when you become disabled and when you die.

Almost no catch. A Special Needs Trust you set up for your disabled relative does not have to have a Medicaid payback provision. In fact, you can even decide what happens to any remaining assets after your disabled relative dies. The person who contributed the money has the right to cancel the trust at any time and take their money back. However, the Trustee is still not allowed to pay the disabled person directly, only use the trust to pay their bills.

The person who benefits from the trust does not have the ability to cancel the trust and get the money outright.

In order for a Special Needs Trust to do its job of qualifying you or your relative for Medicaid, the trust has to be formed with all of the proper procedures and notices. Some types of Special Needs Trusts have annual reporting requirements.

To find out if you qualify for a Special Needs Trust and which one works best for your situation, call us, the Law Offices of Albert Goodwin at (212) 233-1233 or (718) 509-9774.