The Basics of Special Needs Trusts

Trusts can be a critical part of elder law planning and special needs planning. Lawyers understand the tedious process behind the different types of trusts such as specific language necessary, types of trusts available, and which trust would best benefit the client. We will take a dive into some of the concepts and terms of special needs trusts.

What are Special Needs Trusts?

A special needs trust is specifically used for special needs planning. This trust allows a beneficiary to withhold access to public benefits while being able to benefit from those assets to a degree. With any trust, the Trustee manages those assets of the trust for the benefit of the beneficiary. 



When it comes to the distributions during the lifetime of the beneficiary, the trust can be where the Trustee is the only one that can make distributions that supplement government benefits or a supplemental distribution standard. If there is a standard in the trust document, it is discretionary. Only if the beneficiary is not currently on public benefits. The trust document indicates that once the beneficiary is on public benefits, distributions may not supplant, impair, or diminish those benefits. 



It is also an option that a trust can be that the Trustee can also make distributions that supplant government benefits, a supplemental and discretionary distribution standard. This means to replace or decrease those benefits. In that case, the Trustee may distribute trust assets with knowledge that the distribution could decrease the amount of government benefits received by the beneficiary. They should only make this decision if it is in the best interest of the beneficiary. The Trustee can also make supplemental distributions. 

First-Party SNT

A first-party special needs trust, also referred to as a d4A trust. It has this technical name because of its location within the US Code. A d4A is a self-settled trust. A self-settled trust is funded by assets of beneficiary. The beneficiary is also the applicant of government benefits. The assets are used for the beneficiary’s personal benefit only. In order to avoid Medicaid transfer penalty, the person must be under the age of 65 when the trust is established and the individual establishing the trust must be either the beneficiary. This can be a parent, grandparent, or legal guardian of the disabled beneficiary. It can also be a court. If the individual is over age 65, a transfer penalty may be imposed when applying for certain long-term care Medicaid benefits.



The state must be the remainder beneficiary of any funds remaining in the d4A trust after the death of the beneficiary, up to the amount the state expended on benefits for them. Some states require a Medicaid agency be listed in the trust agreement. For most states, however, it is sufficient to give a generic reference to the state in the payback provision. After any government agencies are repaid for benefits received, any remaining trust assets will be distributed to residuary beneficiaries.



A typical client would be one that has assets to preserve while still desiring to qualify for benefits. If this client won an award or settlement and was already on public benefits and would like remain on those benefits or if this client was the recipient of an inheritance and doesn’t want their new found wealth to disqualify them from benefits, it would be beneficial to have a d4A trust. 



A subset of the trust is one with a Medicare Set-Aside (MSA) sub-trust. This MSA is oftentimes required when there is a personal injury or worker’s compensation settlement. Medicare wants to preserve a certain amount of the proceeds of the settlement so they aren’t dissipated while Medicare is left paying for future medical expenses. So, a requirement of the settlement agreement may be to set aside a certain amount of the funds for future medical bills that Medicare would otherwise be forced to cover.

Third-Party SNT

A third-party trust special needs trust is also known as a supplemental needs trust. It is funded by assets that belong to else that is not the beneficiary. This type of trust is not specifically authorized by US Code. Therefore, there are no age limits for this type of trust invoke a Medicaid transfer penalty. However, if the beneficiary has the power to revoke, terminate, or sell the trust for their own benefit, then it is a countable resource for Medicaid purposes. Otherwise, it is usually exempt. The assets used to fund the trust never belonged to the beneficiary. Therefore, a payback provision is not required.



A common client would be an individual who wants to set aside money for a disabled friend or family member for their future care. This can be done anytime while the donor is alive or as a part of their estate plan. The estate plan usually contains contingent special needs trust provisions. This directs the share going to a beneficiary. The beneficiary would be on public benefits, specifically into a third-party supplemental needs trust.

Pooled Trusts

A pooled trust (US Code 1396p(d)(4)(C)) is also known as a d4C trust. It is established and managed by a charity or non-profit organization. It is funded by the disabled person, for that individual’s sole benefit. The idea is that an individual’s trust is a subaccount within a master trust. A master trust is a collection of other individual trusts. The managing entity oversees the collective individual trusts within the pool as a whole.



The arrangement minimizes expenses for the individual trusts. The trust may need a payback provision, just depending upon the particular trust’s joinder agreement and may have age limits, for pre- and post-age 65 transfers, depending upon state law. A typical client may be one with minimal assets to fund into the trust, so that a traditional d4A trust would be fiscally unreasonable.

Sole Benefit Trusts

A sole benefit trust (subsection 1396p(c) of the US Code) is a hybrid trust. It is used to preserve the assets of a Medicaid applicant. The grantor funds the trust for the benefit of a disabled person under age 65 – or for a disabled child or spouse of any age – typically without suffering from transfer penalties for those transfers. This trust is used in an emergency, often during Medicaid crisis planning.



The rules of a particular state may have restrictions or could create additional requirements for a sole benefit trust. Some states may not require a payback provision if the trust is actuarially sound. The sole benefit trust typically must either pay out all assets within the beneficiary's life expectancy, be payable to the beneficiary's estate upon death, or include a payback provision reimbursing the state.

The Secure Act

The Secure Act, also known as Setting Every Community Up for Retirement Enhancement Act, besides encouraging employers who were reluctant to invest in wealth management plans earlier, is an easier and cheaper plan to administer. There is one big anti-taxpayer change included in the act that will make the financially comfortable population and estate planners think twice. In this article, we will cover all the major aspects of the act, especially those that will impact individuals and small businesses.



Read our Secure Act Blog here.

In Sum

Trusts can be essential for elder law and special needs planning attorneys. Knowing which trust would benefit a client best can be tough to grasp. The rules of law differ with each particular type of trust and within the individual states. A successful trust requires thoughtful planning and extensive knowledge.

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