Special Needs: The Bottom Line About Special Needs Trusts

How to Use an Special Needs Trust to Plan for Your Loved One’s Future

Sometimes it can feel overwhelming to navigate the complex and often contradictory eligibility rules governing public benefits available to individuals with special needs. When you add trying to maximize your loved one’s quality of life to the mix, it can feel downright impossible. That’s where Special Needs Trusts (SNT) come in. In this month’s article about Special Needs Financial Planning, we will be covering the basics of SNTs and how we believe they can be used to plan for your loved one’s future.

What Is a Special Needs Trust & Why Is It Important?

A special needs trust is an irrevocable trust for the benefit of a person with special needs. Because it is irrevocable, money put into that trust is not counted as a resource when determining means-tested benefits like Supplemental Security Income (SSI) or Medicaid.

The primary financial goal of an SNT is to ensure your loved one will continue to receive public benefits while having sufficient assets to support them for the duration of their lifetime. It can provide for your loved one even in your absence, making it an especially useful tool for lifetime planning.

A special needs trust can be used for a variety of things including many everyday expenses. The table below shows several common uses, but the funds can be used for nearly anything except the cost of lodging and meals.

Types of Special Needs Trusts

There are 4 types of commonly used Special Needs Trusts.

1.     Self-Settled/d(4)(a) Trusts

A self-settled special needs trust is also called a d(4)(a) trust because of the federal law that authorizes them. It should be considered when an individual with special needs either has, or is expected to receive, a significant amount of assets. It is used to transfer the funds out of the individual’s name to maintain eligibility for government benefits. Common characteristics of a self-settled trust include:

  • It can only be created for individuals under the age of 65.
  • It can only be created by one of five parties: The individual, parent, grandparent, guardian, or the Court.
  • In most cases, a corporate trustee will be required, unless the amount of the trust makes a corporate trustee infeasible.
  • The trust terms should prevent distributions of principal or interest to the individual with special needs in order to avoid disqualification for public benefits.
  • The primary limitation of self-settled SNT is the reimbursement requirement.

The reimbursement requirement means that upon the death of the individual with special needs, the appropriate state authority must be reimbursed for payments made by Medicaid for the benefit of your loved one during their lifetime. This reimbursement is paid from the trust’s remaining assets upon your loved one’s passing.

Though this stipulation may seem a little harsh, there are several benefits to this type of trust. During reimbursement, services are repaid at the Medicare rate instead of the normal (typically higher) rates that private pay would incur.

Additionally, a self-settled SNT can help individuals with special needs maintain their eligibility to receive government support while also receiving the supplemental support needed to provide the desired quality of life. Further, if all of the trust’s assets are used during the beneficiary’s lifetime, then no Medicaid reimbursement is required.

Lastly, self-settled SNTs can also provide for additional beneficiaries in the event supplemental support and Medicaid reimbursement do not exhaust all of the trust’s funds.

2.     Supplemental Special Needs Trusts

A supplemental SNT should be considered when a family or friend wishes to leave assets to an individual with special needs. These trusts protect the individual’s eligibility for public benefits, while providing funds to enhance the individual’s quality of life.

The primary difference between supplemental and self-settled SNTs is the reimbursement requirement. If a supplemental trust is appropriately drafted and funded, there is no reimbursement to the state for Medicaid services. As such, third-party grantors should avoid contributing funds to a self-settled SNT to prevent the reimbursement requirement from being triggered.

Here are some characteristics to keep in mind if you are considering a supplemental SNT:

  • The person contributing to the trust (the grantor) can name remainder beneficiaries to receive any assets left in the trust when the individual with special needs passes.
  • The purpose of a supplemental SNT is to supplement, not replace, the government benefits provided to the individual with special needs.
  • Corporate trustees are not required but are still recommended.
  • Supplemental SNTs can be funded using existing assets or life insurance as is the case with an irrevocable life insurance trust (ILIT)

Supplemental SNTs are common when family members or friends want to gift cash or assets to an individual with special needs without disrupting their government eligibility.

3.     Miller Trusts

A Miller trust is also called a qualified income trust or QIT. It is a type of self-settled SNT designed for states that use income cap requirements for Medicaid eligibility.

Miller Trusts are not very common, and chances are you will not need this type of trust, but here are the basic characteristics:

  • This is the only type of self-settled SNT that can be created by an individual over the age of 65.
  • It is designed to receive all the beneficiary’s income, including pension and social security income.
  • If the trust is properly drafted, the income received and accumulated in the trust will not be treated as income for the purposes of the Medicaid income test.
  • The Trustee disperses an amount up to the income qualification limit of Medicaid to the service providers and retains the excess income in the trust.
  • At the death of the beneficiary, Medicaid is fully reimbursed for expenditures made on behalf of the individual with special needs during their lifetime.

These types of trusts are allowed under Florida law, but they are not permitted in all states.

4.     Pooled Trusts

A pooled trust is a form of SNT created and administered by a nonprofit organization.

Funds contributed by or for a beneficiary with special needs are placed in a separate account but are “pooled” with other accounts for the purposes of investing.

Like other SNTs, distributions are made for the supplemental expenditures of the individual with special needs.

Unlike other SNTs, however, the assets remain in the pooled trust when the individual with special needs passes. At that point, the non-profit organization managing the funds can either use them for the benefit of other beneficiaries within the pooled trust, or they may be required to reimburse the state for Medicaid expenditures. Either way, the original grantor of the assets no longer has legal claim or authority to decide what happens to the remaining trust funds.

Pooled trusts use a master trust agreement approved by the State Medicaid Agency. Since these trusts are already established and operating, they are typically an effective solution for smaller settlements or inheritances.

Making the Right Choice

Choosing to utilize a special needs trust is not a decision to make lightly. They can benefit from both legal and financial expertise to ensure they are properly drafted and funded for your loved one’s needs. At Aviance Capital Partners, we can help you make the best decision when it comes to how to structure supplemental funds for your loved one. We partner with several trusted attorneys who can draft an SNT tailored to your family’s unique needs. We don’t just plan for a time, we plan for life. To learn more about how we help special needs families plan for a lifetime, reach out to us at wealthrelations@aviancepartners.com or (239) 598-4747.

Disclosures: Aviance Capital Partners, LLC (“ACP”) is an SEC registered investment adviser located in Naples, Florida. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that ACP has attained a certain level of skill, training, or ability. While information presented is believed to be factual and up-to-date, ACP does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of ACP as of the date of publication and are subject to change. Not all services will be appropriate or necessary for all clients, and the potential value and benefit of the ACP’s services will vary based upon the client’s individual investment, financial, and tax circumstances. The effectiveness and potential success of a tax strategy, investment strategy, and financial plan depends on a variety of factors, including but not limited to the manner and timing of implementation, coordination with the client and the client’s other engaged professionals, and market conditions. This should not be construed as specific investment, financial planning or tax advice tailored to an individual reader. ACP suggests that readers consult a financial professional, attorney or tax advisory professional about their specific financial, legal or tax situation. Past performance does not guarantee future results. All investment strategies have the potential for profit or loss, and different investments and types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment or investment strategy, including those undertaken or recommended by ACP, will be profitable or equal any historical performance level. Additional information about ACP, including its Form ADV Part 2A describing its services, fees, and applicable conflicts of interest and its Form CRS is available upon request and at https://adviserinfo.sec.gov/firm/summary/146597. For current ACP clients, please advise us promptly in writing, if there are ever any changes in your financial situation or investment objectives, if you wish to impose any reasonable restrictions to our management of your account, or if you have not been receiving at least quarterly account statements from your account custodian.


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