A special needs trust is a unique estate planning tool designed to benefit a person with a physical or mental disability. This trust is particularly useful for a beneficiary who receives government benefits, such as Supplemental Security Income (SSI) or Medicaid, as a properly set up special needs trust does not affect benefit eligibility.
Components of a Special Needs Trust
All trusts, although used for varying purposes, involve the same three parties:
- Grantor. The grantor, or donor, is the person who creates the special needs trust and places assets within the trust. The donor can provide instructions for the trustee on how to manage the trust fund.
- Trustee. The trustee is the person or third-party responsible for administering the trust’s assets.
- Beneficiary. The beneficiary is the person(s) who receives the benefits from the special needs trust.
Types of Special Needs Trusts
There are three types of special needs trusts:
1. First-Party Special Needs Trust.
In this trust, assets belonging to the beneficiary fund the trust. Under current regulations, however, the beneficiary cannot set up their own first party special needs trust – even if they have the mental capacity to do so. Instead, the beneficiary’s parents, grandparent, guardian or the courts must establish the trust. A first party special needs trust also includes a Medicaid payback provision. Upon the beneficiary’s death, the trust must reimburse Medicaid for medical assistance provided to the beneficiary before heirs can receive any remaining funds.
2. Third-Party Special Needs Trust.
Unlike a first-party special needs trust, a third-party special needs trust does not receive funding from the beneficiary, but from parents or other relatives. A third-party special needs trust does not contain the Medicaid payback provision. A third-party special needs trust is a beneficial estate planning tool for parents of guardians of special needs children because it provides funds for continuing medical care for the child even after the parents or guardians are gone.
3. Pooled Trust.
A pooled special needs trust is commonly used when the grantor has a modest sum and might not want to create an individual trust or has difficulty choosing a trustee. In a pooled special needs trust, a nonprofit organization allows beneficiaries to pool funds together for investment purposes. Each beneficiary has a separate account and receives proportional funds of their contribution to the pool for his or her respective needs. This option is not necessarily available in all states/jurisdictions due to varying state requirements for Medicaid and other assistance programs.
Choosing the right special needs trust for your estate plan can be difficult, but having the right team in place can put your mind at ease. To get started, contact a Fifth Third Bank financial advisor today.
Fifth Third Bank does not provide tax or legal advice. Please consult your tax adviser or attorney before making any decisions or taking any action based on this information. This information is provided for educational purposes only and does not constitute the rendering of tax or legal advice.
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