Two Different Types of Special Needs Trusts

There are two types of Special Needs Trusts (SNTs), first-party and third-party SNTs. It is vital to know which type of SNT you have or need. It all depends on whose property is funding the SNT.

If the property funding the SNT originates with the SNT beneficiary, then it is a first-party SNT. However, if the property funding the SNT has always belonged to someone other than the SNT beneficiary, then it must be drafted as a third-party SNT. 

Third-party SNTs are usually used by people who are planning in advance for a loved one with special needs. Generally, the parents of someone with disabilities or special needs will be the person who establishes a third-party SNT, although a grandparent, a sibling, or any other person (other than the beneficiary) may establish the SNT.

Third-party SNTs can be included in a Last Will and Testament, established within an inter vivos trust that is designed to avoid probate (“Living Trust”), or drafted as a stand-alone SNT. These SNTs are usually funded upon the death of the beneficiary’s parents or the other individual(s) who established the SNT. 

SNTs that have been created under a Will or as a sub-trust within a Living Trust do not come into existence (and therefore cannot receive gifts) until after the death of the person whose Will or Living Trust created the SNT. So, because of this, a stand-alone SNT may be more useful if there are multiple donors who wish to fund the SNT. 

This type of SNT does not have to be irrevocable in order to preserve the eligibility of the SNT beneficiary for means-tested public benefits. However, if the SNT beneficiary has the power to get rid of the SNT, the SNT assets would be considered an available resource for Supplemental Security Income (SSI) and Medicaid purposes. The beneficiary’s ability to get rid of the SNT or otherwise exercise control over the SNT may render the beneficiary ineligible to receive public benefits that have an income or asset limit.

The SNT agreement should authorize the person establishing the third-party SNT and/or the trustee to amend the SNT to address later changes in the law or the circumstances of the beneficiary. Allowing for such limited amendments helps ensure that essential government benefits are preserved if an agency challenges the terms of the SNT. 

First-Party Special Needs Trusts 

First-party SNTs are usually used when the person with a disability inherits money or property immediately, or receives a court settlement. These SNTs also are useful when a person without a prior disability owns assets in their own name, later become disabled, and will then need to qualify for public benefits that have an income or asset limitation. 

Until the Special Needs Trust Fairness Act was written into law late in 2016, the only people authorized to create an individual first-party SNT were the SNT beneficiary’s parent, grandparent, legal guardian, or a court. Since late 2016, federal law also authorizes a mentally and legally competent SNT beneficiary to establish an individual first-party SNT.

A first-party SNT is funded with property that belongs to the beneficiary, or to which the beneficiary is or becomes legally entitled. Property in a first-party SNT can only be used for the “sole benefit” of that beneficiary. Individual first-party SNTs may be created (and funded) only for individuals who meet the government’s definition of “disabled” and are under sixty-five years of age when the SNT is established (and funded). 

All first-party SNTs must specify that after the beneficiary’s death, all amounts remaining in the SNT, up to an amount equal to the total lifetime medical assistance benefits paid on behalf of the beneficiary by the Medicaid program(s) of any state(s), are first repaid to those state Medicaid program(s), even to the extent of fully exhausting the remaining SNT assets. Only after this Medicaid payback may any balance be distributed to other remainder beneficiaries. 

A legally competent person with a disability may have a first-party SNT established and funded without court involvement. However, annual accountings should be provided on an informal basis to the beneficiary and to the applicable Medicaid agencies.

When a minor or mentally incompetent adult is legally entitled to receive funds from a lawsuit, an inheritance, or from any other source, then court approval to establish and fund the first-party SNT is required. Often, the court must make specific findings to ensure that the SNT is considered “exempt” when determining the beneficiary’s eligibility for public benefits that have income or asset qualification thresholds.

These findings could include: 

• The minor or adult has a disability that substantially impairs the person’s ability to provide for his or her own care or custody, and constitutes a substantial handicap. In practice, a person who qualifies for SSI or Medicaid on the basis of disability is likely to satisfy the substantial impairment requirement. 

• The minor or adult is likely to have special needs and expenses that will not be met without setting aside assets in the SNT. 

• The property used to fund the SNT does not exceed the amount that appears reasonably necessary to meet the special needs of the minor or adult. 

Pooled Special Needs Trusts 

Pooled SNT programs can be used to establish both first-party and third-party SNTs. Pooled SNTs are established and administered by a non-profit association for the benefit of multiple beneficiaries.

Pooled SNT programs have the following features: 

• A separate account is maintained for each individual beneficiary of the pooled SNT, but the administrator pools the assets of all accounts for purposes of investment and management. 

• A master trust agreement governs the separate accounts of all SNT beneficiaries pursuant to a “joinder” document.

• An account with the pooled SNT is established for the sole benefit of an individual with disabilities by the parent, grandparent, or legal guardian of the individual, by the individual personally, or by a court. The beneficiary of a first-party account must meet the government’s definition of “disabled.”

• While there is no express prohibition against establishing and funding a first-party account with a pooled SNT if the beneficiary is sixty-five years of age or older, most states do impose an eligibility penalty in that situation. 



• For first-party accounts with pooled SNTs in all states any assets remaining in the beneficiary’s separate account upon his or her death, to the extent not retained by the pooled SNT, first must be used to reimburse the Medicaid program(s) of any state(s) that has provided medical assistance for the beneficiary. However, a state is not entitled to receive more than the amount remaining in the beneficiary’s separate account, even if the amount owed to the state is greater than the amount remaining in the deceased beneficiary’s separate account. 
  

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