The Settlement Alliance

Which Type of SNT is Right for Your Disabled Client?

Which Type of SNT is Right for Your Disabled Client?

Sep 14, 2015

An individual who receives money from a personal injury settlement has a number of important considerations when it comes to how the funds will be distributed. For those on needs-based government benefits such as Medicaid and SSI, the additional income could cause a loss of benefits that could far outweigh the settlement. This can be particularly troublesome for disabled individuals who rely on monthly income from the government to support their daily needs, but even more important is the potential loss of healthcare benefits. Fortunately, a special needs trust (SNT) can preserve eligibility for many government benefit programs while allowing the disabled individual to access their settlement proceeds within the trust when needed. Prior to determining whether a special needs trust is the right choice for your client, there are many factors that must be considered. Once it is determined that a special needs trust is, in fact, the proper investment vehicle for your disabled client, it is important to analyze and evaluate which type of SNT best fits their current and future needs.

Making the Right Decision

In order for a settlement planner or an elder law attorney to advise your client on the proper type of SNT, some essential questions need to be answered, including:

  • Does your client currently receive any needs-based government benefits (e.g. SSI, Medicaid, food stamps, Section 8/HUD housing, etc.)?
  • What age will your client be when establishing the trust?
  • What are your client’s current assets?
  • What is the current household income?
  • What are the expected monthly needs of your client?
  • Do the anticipated assets to be placed into the trust belong to the disabled individual or a parent/guardian?
  • Will your client utilize a structured settlement annuity to fund tax-free income directly into the special needs trust?

While some might believe that a settlement should be enough to replace government benefits, in many cases—even in the case of multi-million dollar settlements—the future value of the government benefits far outweighs the expected growth of the settlement.

First Party Special Needs Trusts

A first party special needs trust (sometimes referred to as a “(d)(4)(a) trust”) is funded with assets belonging to the beneficiary (i.e. settlement funds). If the individual is under age 65, deemed to be disabled, and is currently receiving needs-based benefits such as SSI and Medicaid, this could be a good option.

Under current regulations, disabled individuals are not allowed to set up their own first party SNTs, regardless of whether or not the individual has the mental capacity to do so. Instead, the trust must be established by the beneficiary’s parent, grandparent, guardian, or the court. Earlier this year, the “Special Needs Trust Fairness Act of 2015” (H.R. 670) was introduced in Congress. Should the legislation pass, the disabled individual would be added to the list of individuals who can establish the trust.

First party SNTs also include a Medicaid payback provision, which requires that upon the death of the beneficiary, any remaining funds must be used to reimburse Medicaid for the amount of medical assistance provided to the beneficiary. If any funds remain after reimbursing Medicaid, those funds may be eligible for distribution to beneficiaries and/or heirs.

Pooled Trusts

For disabled individuals over the age of 65 who receive needs-based benefits, a pooled trust (sometimes referred to as a “(d)(4)(c) trust”) could be an option for preserving benefits.

The pooled trust is established and managed by a nonprofit organization, and the assets within the trust are “pooled” for investment, with a sub-account managed by the nonprofit for each beneficiary. Unlike a first party SNT, the disabled individual can establish their own sub-account in a pooled trust.

The manner in which the remaining funds are handled after the beneficiary’s death depend on the terms of the trust. In some cases, the funds may remain in the pooled trust. In other cases, funds not retained by the pooled trust must be used to reimburse Medicaid prior to being distributed to any remaining beneficiaries.

Third Party Special Needs Trusts

A third trust option for disabled individuals is a third party special needs trust. Third party SNTs differ from first party SNTs in a number of ways, including how they are funded. Unlike first party SNTs, third party SNTs are funded with assets owned by parents or other relatives, not by the beneficiary. Much like the other types of SNTs, a third party SNT can allow the beneficiary to maintain eligibility for needs-based government benefits.

A third party SNT provides parents and guardians with a solution for ensuring that the disabled individual will have funds to cover medical needs once the parent or guardian passes away—or even during the parent or guardian’s lifetime.

When establishing the trust, the Grantor must stipulate how to handle any remaining funds in the trust upon the death of the disabled individual.

If your client is disabled and will require future medical care, contact The Settlement Alliance to discuss trust options. The Settlement Alliance has access to many of the best elder law attorneys across the country, and can help you determine the best strategy for your client based on their needs and jurisdiction.

We are proud to partner with the highest rated structured settlement providers in the industry:

  • American general Life Companies
  • Berkshire Hathaway Structured Settlements
  • MetLife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential