Types of Special Needs Trusts: Who Can Set One Up?

If you have a disabled relative or close friend, there is some important information you should have regarding special needs trusts (SNT). A special needs trust (sometimes called supplemental needs trusts) is a legal document created for a person who, because of physical or mental disability, or chronic or acquired illness, at under age 65, is receiving federal and state government benefits for medical care and daily living needs, such as Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, subsidized housing and others. The purpose of this type of trust is to provide a source of funds, such as those that are inherited, without disqualifying the beneficiary from receiving these government benefits. The trust funds are used for supplemental care, over and above what the government benefits provide.

Who can set up a special needs trust for a disabled individual depends on the type of special needs trust. There are three main types: Family Trust, Pooled Trust and Court-Ordered Trust.

Family-Type Special Needs Trust

By far, this is the most common SNT you will find. The parents provide the money to set up the trust either during their lifetime in a living or inter vivos trust, providing in the trust that the disabled son or daughter is the beneficiary; or, after they die, by directing its creation in their will. If it’s a living trust, it becomes effective immediately, and anyone, including grandparents, aunts, uncles, and even friends, can give money to the trust by either writing a check or including the trust as a beneficiary in their will. Parents often purchase a life insurance policy payable to the trust, as well. The only person who cannot place money into this type of trust is the disabled person.

The key to a family special needs trust is that the money cannot be used for housing, food, or clothing. Those are considered basic needs under SSI laws. If the disabled person is receiving free housing, food or clothing from someone else, including a family member or a trust, then the government benefits will be reduced or eliminated.

Pooled Trust

Although anyone can put money into a pooled trust—parents, grandparents, friends, or even the individual with the disability (the beneficiary)—this type of trust must be established by a non-profit-association. The trust pools the funds of many beneficiaries, manages and invests them. The funds are pooled, but each beneficiary has his or her own account. An advantage of pooled trusts is that they are willing to handle much smaller accounts than a bank or trust company, so people of modest means can have access to sophisticated trust services. A disadvantage of pooled trusts is that the non-profit has control of the disbursements. Like a family-type trust, the pooled trust is there to pay only expenses outside of the basic care provided by government benefits. Any money left in the trust after the beneficiary dies stays in the trust to help others with disabilities.

Court-Ordered Special Needs Trust

A court-ordered trust, also referred to as a Type A special needs trust, is used only for special circumstances, such as where the disabled person has inherited money or received a court settlement and that money would otherwise disqualify them from receiving government benefits. A court-ordered trust can be set up by the parents, grandparents, legal guardian, or the court itself. To qualify, the disabled person has to be under 65 years old and meet the medical standards of Social Security, in terms of the disability. The trust has to specify that after the disabled person has died, any funds remaining will be used to pay back the state of residence for whatever medical assistance the government provided to the individual after the trust was set up.

Special needs trusts are very complicated, legally binding documents. If you have questions about creating this type of trust, it would be wise to consult a qualified trust attorney who has experience establishing special needs trusts.

For more information about special needs trusts, refer to the following articles:

• Special Needs Trusts
• Who Should Have a Special Needs Trust?
• How to Create a Special Needs Trust and What to Include In It
• How to Fund a Special Needs Trust and How the Money May Be Spent
• Special Needs Trusts and Eligibility for Federal and State Assistance

Case Studies: Special Needs Trusts

Case Study 1: Family-Type Special Needs Trust

The Johnson family establishes a family-type special needs trust for their son, Ethan, who has a developmental disability. Mr. and Mrs. Johnson create a living trust during their lifetime and designate Ethan as the beneficiary. They also include provisions for other family members and friends to contribute to the trust.

To ensure additional financial support for Ethan’s future, the Johnsons purchase a life insurance policy that will pay into the trust upon their passing. It is important for the trust funds not to be used for housing, food, or clothing to maintain Ethan’s eligibility for government benefits.

Case Study 2: Pooled Trust

Sarah, a young adult with a physical disability, sets up a pooled trust to secure her financial future. Sarah, along with her parents and close friends, contributes to the trust. Since Sarah has modest means, the pooled trust managed by a non-profit organization allows her access to professional trust services.

The pooled trust ensures that Sarah’s government benefits cover her basic care, while the trust funds are used for supplemental needs such as therapy, assistive devices, and recreational activities. Upon Sarah’s passing, any remaining funds in the trust will benefit other individuals with disabilities.

Case Study 3: Court-Ordered Special Needs Trust

The Walker family establishes a court-ordered special needs trust for their daughter, Lily, who recently received a significant court settlement due to a medical malpractice case. The settlement amount could disqualify Lily from receiving government benefits, jeopardizing her access to essential care. To protect Lily’s eligibility, the court approves the establishment of a special needs trust.

Lily’s grandparents, who are her legal guardians, work with an attorney to set up the trust. The trust specifies that after Lily’s passing, any remaining funds will be used to reimburse the state for the medical assistance provided during her lifetime.