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Special Needs Trust – An Estate Planning “Superpower”

By: Attorney Katherine S. Breckenridge, Esq.

Published January 1, 2020

Wills and Trusts: Special Needs Trust – An Estate Planning “Superpower”

Estate planning “superpowers!” Yes, they do exist. One of them is a Special Needs Trust (SNT). In the world of estate planning, a SNT is an imperative consideration for those who are recipients of needs-based government benefits that are means-tested.

Think of a SNT as an avenue to provide supplemental support to an individual who has a disability and who is a recipient of government benefits that are only awarded as long as her assets are valued at certain amount. For example, if an individual has a disability that falls within an area defined as deserving of government assistance, but that has her own resources with an asset value above the set amount, or she inherits assets that would increase her asset value above the set amount, both precluding her from being a recipient of the needs-based government assets, a SNT may be a consideration.

The Code of Virginia, § 64.2-779.10. Trust for beneficiary with disability, defines the parameters of a SNT and the respective beneficiary. “Beneficiary with a disability” means a beneficiary of a first trust who the special-needs fiduciary believes may qualify for governmental benefits based on disability, whether or not the beneficiary currently receives those benefits or is an individual who has been determined to be an incapacitated person . . . “Special-needs trust” means a trust the trustee believes would not be considered a resource for purposes of determining whether a beneficiary with a disability is eligible for governmental benefits.

The SNT is a trust designed to provide for supplemental needs that are beyond the very basic needs met by the government-based assistance. The assets in a SNT may assist with enhancing the quality of life of the beneficiary, allowing for expenditures such as transportation, recreation, dental care, and communication services.

SNTs are complex trusts and require careful drafting and administration. There are two types of SNTs, self-settled and third-party. Self-settled (first-party) SNTs are funded with the beneficiary’s own assets, whether through resources she already has, assets inherited when a SNT was not considered, or through a settlement awarded in the event of a personal injury.

This article focuses on third-party SNTs. Third-party SNTs may be used as part of the estate planning of individuals other than the individual with the disability who is a recipient of needs-based government assets and who would be the primary beneficiary of the SNT, such as the parents or relatives of the individual with the disability. Thus, if the individual is a recipient of Medicaid or Supplement Security Income (SSI), the assets in the SNT would provide additional resources that are not met by the public benefits, without precluding the receipt of such public benefits.

The funding of a third-party SNT may occur during the life of the donor(s) or upon the death of the donor(s). When a SNT is established during the life of the donor, the benefit is two-fold. A parent, relative, or friend may convey gifts to the SNT in order for the beneficiary to receive immediate or timely benefits. Creation of the SNT during the donor’s lifetime also allows for the existence of the SNT to be communicated to relatives. This enables the presentation of inter vivos gifts to the beneficiary or the conveyance of assets through a trust or last will and testament; the asset can be transferred to the trustee of the SNT for the benefit of the beneficiary without causing a preclusion from government benefits.

The alternative to establishing a SNT during the life of the donor is to include SNT language in the donor’s trust or last will and testament. The effect is that a SNT is only established if the beneficiary who is a recipient of needs-based government benefits that are means-tested survives the decedent. In such a case, the SNT may be funded from sources such as: life insurance proceeds, retirement plans, assets that pass by probate, or assets distributed from a trust.

Transfers to a SNT are completed gifts; it is wise for a donor to consult with her Certified Public Accountant (CPA) prior to the conveyance of a gift. There are times when third-party SNTs are funded only with “seed money,” and receive additional funds at the death of a parent or relative. Following the initial funding of the third-party SNT, the beneficiary should be given notice of the existence of the SNT, and the Social Security Administration should be notified.

Prior to substantial funding of the SNT, it may be appropriate for a parent or family member to serve as trustee. However, in addition to avoiding conflicts of interest between family members and the beneficiary, the administration of SNTs is complex; therefore, consider naming a corporate trustee as a successor trustee. In addition to taking special care in the naming a trustee, the services of a CPA who is familiar with SNTs should be engaged.

As you review your own estate planning, ask yourself the following questions. Is your loved one, like a child – whether a minor or an adult child, a recipient of or may become a recipient of needs-based government benefits that are means-tested? Would you like to gift assets to her while you are alive? Do you intend to leave assets to her upon your death? Does she depend on her government benefits? If you have answered “yes” to any of these questions, perhaps the estate planning “superpower” of a SNT may be worth your consideration.