What is a Special Needs Trust and When is it Needed?

A Special Needs Trust is also known as a Supplemental Needs Trust and these trusts are created to protect assets for a party who is receiving SSI Disability or Medicaid based on need. When an individual is disabled and is receiving government benefits because they are not allowed to have many assets, then it is important for them not to receive a large amount of assets upon the death of their parent. Special needs trusts were created to allow assets to be held in this type of trust and not be countable as an asset for the beneficiary of the trust who continues to receive their government benefits and support based upon need. These trusts are designed to supplement the needs of a disabled individual, not to take the place of their basic needs.

There are two types of supplemental needs trust, one is called a third-party special needs trust which can be created by someone other than the disabled party. In other words, a parent can establish a supplemental needs trust for a child, and this is a living trust that is created while the child is alive. Anyone can contribute to a supplemental needs trust once it is created for the benefit of a disabled person. If a third-party special needs trust is created, then one of the benefits is that once the disabled beneficiary of the trust dies money left in the trust can be directed to an individual who is named at the time the trust is established. In other words, it is not used to pay Medicaid back or to reimburse any other government agency for benefits paid to the disabled beneficiary during his or her lifetime.

The other type of special needs trust (which are called a first party special needs trust) is what occurs when a disabled person who is under sixty-five years of age and receives funds from any source. These funds could come from the death of a parent and the funds are payable directly to the disabled child. Another way to receive these types of funds would be the settlement of an accident claim where a person becomes disabled and received a settlement directly to that person. Both of these examples would cause an individual who is disabled and under the age of sixty-five to lose all of their government benefits because of the newly received asset. The idea behind this trust is similar to the third-party special needs trust in that assets can be placed into the trust and the disabled individual will continue to receive their government benefits. These trusts are typically created by a guardian, a parent, grandparent, court or the disabled person themselves. By creating this first-party special needs trust the assets are held in trust and for the benefit of the disabled party and the assets in the trust are to supplement their needs. In this respect the disabled party does not lose their government benefits. The only drawback to this first-party special needs trust is at the death of the disabled beneficiary, monies in the trust are used to pay back Medicaid for the government benefits that were supplied to the disabled person. That is the primary disadvantage to this type of trust.

It should be noted that the only time a special needs trust can be created by one spouse for another is through a Will. So third party trusts cannot be created by a husband for a wife and vice versa.