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In my next few blogs I will discuss Special Needs Trust (SNT), also referred to as a Supplemental Needs Trust, which I believe are often underutilized and misunderstood.

Let’s begin with a simple definition of a Special Needs Trust:  A SNT is a trust that aims to preserve government programs such as Medicaid and Supplemental Security Income (SSI) for the named beneficiary.  Because these benefits are asset and income based, it is critical that any assets and income stay out of the name of the beneficiary.  As a general rule, the trustee will supplement government benefits for costs the beneficiary incurs that are not covered by these programs.

Essentially there are two types of SNTs:

First-Party (self-funded) Trust

The First-Party Trust is used when the beneficiary owns assets or expects to receive assets that would disqualify him or her from receiving assistance from government programs.  The following must be met to satisfy this type of trust:

  • Funding source: the assets of the beneficiary must be used to fund the trust
  • Irrevocable: once funded the assets are no longer the property of the beneficiary,
  • Age: the beneficiary must be under 65 years of age; if the beneficiary is a minor, the trust can only be established by a parent, grandparent, legal guardian or the court
  • Payback provision: upon the death of the beneficiary, any remaining assets in the trust must be used to reimburse state Medicaid to the extent of benefits received

Some examples of situations in which a First-Party Trust may be appropriate would be when assets are received through inheritance, lawsuit settlement, or divorce, if one of the spouses has special needs.

Third-Party Trust

The Third-Party Trust can be established by anyone other than the beneficiary, but is most often funded by family members to assist a person with special needs.  The trust can hold any type of asset including a house, car, cash and investments.  A Third-Party Trust functions very much like a First-Party Trust in that it protects government programs of the beneficiary, however, it does not contain a “payback” provision. This means when the beneficiary dies, any remaining funds in the trust can pass to other family members, or to charity, without reimbursing state Medicaid.

As with any trust (discussed in my previous blogs) there must be a settlor, beneficiary and a trustee.  Special consideration must be given in choosing an appropriate trustee as his or her responsibilities are critical to the well-being of the beneficiary.  I will discuss this in further detail in my next blog, but if you have any questions in the meantime, feel free to reach out to me, John McCarthy, or your Jacobi Wealth Advisor.