Estate Planning Tip: Types of Special Needs Trusts

Special needs trusts can be a confusing topic for the uninitiated. That’s surely because there are many different types of special needs trusts and they are used in different situations. Here is an overview:

First Party Special Needs Trust. This type of trust is also known as a Self-Settled Special Needs Trust or a Medicaid Payback Trust. It can be used by a disabled person under age 65 to shelter his or her own assets. The trust allows the disabled person to become immediately eligible for Medicaid and SSI. It is authorized by federal law and allows a disabled person to receive benefit from his or her own assets while still qualifying for Medicaid and/or SSI. Upon the death of the disabled person, any remaining assets in the trust have to first be used to payback Medicaid. If the assets have been spent on other needs, then Medicaid’s claim will go unsatisfied. Only a parent, grandparent, guardian or a court can establish such a trust. The trustee must be someone other than the disabled person.

Pooled Accounts Trust. This type of trust is similar in many ways to the First Party Special Needs Trust. Under federal law, a disabled person under age 65 can transfer his or her own assets to the trust and gain immediate asset eligibility for Medicaid and SSI. The trust funds are held as a supplemental fund for the disabled person during his or her lifetime. However, upon death, instead of being paid back to Medicaid, the remaining trust funds are paid to a charity. The trust agreement itself is established by a charity and each beneficiary can join the trust and have a separate account under the trust umbrella. The trustee is typically the charitable organization that established the trust or a professional trustee appointed by the charity. Muskegon ARC is the only Muskegon area charity I am aware of that has established such a trust.

Third Party Special Needs Trust. A Third Party Special Needs Trust is usually established by a parent or other close relative of a disabled person by gift during lifetime or upon death through the relative’s estate plan. A testamentary trust established by one spouse for the surviving spouse is also a type of Third Party Special Needs Trust. Unlike the First Party Special Needs Trust, there is no pay back requirement for Medicaid. It allows a disabled person to benefit from a gift or inheritance without losing their Medicaid health benefits. The trust must have someone other than the disabled person serving as trustee and distributions from the trust must be in the sole discretion of the trustee.

Sole Benefit Trust. This trust allows a person in need of nursing home care to become immediately Medicaid eligible by transferring excess assets to a trust established for the sole benefit of a spouse or disabled person. No divestment penalty will be applied against the person needing nursing home care and there is no limit on the amount of assets that can be transferred. The assets will be countable to the spouse or disabled person, however, so care must be taken if that person needs to qualify or maintain eligibility for benefits. Minimum distributions are required to that person each year.