The Settlement Alliance

The 3 Types of Special Needs Trusts You Should Understand

The 3 Types of Special Needs Trusts You Should Understand

Aug 3, 2016

A disabled individual who receives a settlement may face certain consequences if the settlement is accepted as a lump sum.

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 depends 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.

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