What is a Special Needs Trust?

If you have a disabled family member, you are not alone. According to the United States Census Bureau's 2017 statistics, there are more than forty million people in the United States with a disability. This represents over 12% of the population. 

Many families in the United States have a loved one with special needs. My family is one of those families; I have a brother with Down Syndrome.

As I've seen with my own brother, government programs provide critical benefits for special needs individuals. Luckily, families have options to contribute to their loved one's well-being without jeopardizing vital government benefits. One of these options is to create a special needs trust. Another option is to set up an ABLE account. This blog post will look at special needs trusts. 

What is a Special Needs trust?

A special needs trust is a trust created pursuant to federal law to provide funds to special needs individuals for expenses above and beyond the basic level of benefits provided by government programs. These trusts must be carefully drafted to ensure the funds supplement rather than supplant government benefits. There are several different kinds of special needs trusts available.  

Stand-Alone or Testamentary Special Needs Trusts

Special needs trusts can be stand-alone trusts created during the grantor's lifetime or testamentary special needs trusts in a will. Testamentary trusts only come into being at the testator's death. In addition to stand-alone and testamentary trusts, other factors determine the type of special needs trust. The source of the money going into a special needs trust is a critical factor.  Special needs trusts are divided into categories based on the source of the money that will fund the trust.  

Third-Party vs. First-Party Special Needs Trusts 

First-party trusts are funded with first-party funds. This means the trust contains the special needs individual's own money. First-party special needs trusts are required to have a "pay-back" provision stating funds left at the death of the special needs individual will go towards repaying the state for any government benefits received by the individual during his or her lifetime. Therefore, the state is a "beneficiary" of all first-party special needs trusts. 

Third-party trusts are funded with third-party funds from other family members, such as parents and grandparents. Because these funds never belonged to the special needs individual, third-party special needs trusts are not required to have a "pay-back" provision. Any funds remaining in the trust at the death of the special needs individual will go to the donor's remainder beneficiaries.

If you have a special needs loved one and want to include him or her in your estate planning, submit the contact form or call 704.887.5242 to get started today. 

Nancy Roberts
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