On its most basic level, a trust is a fiduciary relationship between three parties: 1) the donor, who supplies funds for the trust; 2) the trustee, who agrees to hold the funds and administer them according to the donor’s wishes; and 3) the beneficiary, who receives the benefit of the funds in the trust.
A special needs trust involves the above-listed three parties, but it is tailored to a person with special needs that is designed to manage assets for that person’s benefit. Most importantly, a special needs trust, when properly drafted, will not compromise the special needs individual’s access to government benefits like Supplemental Security Income (SSI) or Medicaid. The income threshold is imperative when qualifying for SSI benefits because individuals receiving monthly SSI payments can only have $2,000 in assets to his or her name.
A special needs trust is designed to supplement the other benefits for which a disabled individual would otherwise qualify; therefore, the funds in a special needs trust should be used for that individual’s comfort and luxury, not the basic life needs for which the public assistance funds are designed to pay.
There are three main types of special needs trusts: first party trusts; third party trusts; and pooled trusts. In each of the three trusts, the person with special needs is the beneficiary. A first party trust holds assets that belong to the person with special needs, such as funds received from an inheritance or accident settlement. A third party trust holds funds that belong to other people who want to help the person with special needs. And a pooled trust holds funds from many beneficiaries with special needs.
In a first party trust, the funds held in trust will be used for the special needs individual’s benefit while the beneficiary is alive. When the beneficiary dies, any remaining funds in trust will be used to reimburse the government for the cost of the individual’s medical care.
A third party trust is most often used by parents or other family members of a special needs individual to assist with the beneficiary’s care. This type of trust can hold any kind of asset, and the beneficiary never owns property in the trust and does not have direct access to any of the trust’s funds. When the beneficiary dies, any remaining assets will pass to other family members or to a charity without having to be used to reimburse the government.
In a pooled trust, a charity sets up a trust to allow multiple beneficiaries to pool their resources for investment purposes, and the charity maintains separate accounts for each beneficiary’s needs. When a beneficiary dies, the funds remaining in his or her account go to reimburse the government for care, and a portion goes to the non-profit organization responsible for managing the pooled trust.