Navigating the complexities of special needs planning can be daunting for families. This is made even more challenging when put in the context of generational changes and how disabilities have been handled both by families and society over the years. Even within the last century, we have seen extraordinary changes and advancements in helping individuals with different ability levels succeed and live lives of greater independence and fulfillment.

History

As recently as 1944, a law called the 1944 Education Act labeled children with disabilities as “ineducable” and denied them education. Many families faced limited options, often choosing to place loved ones in institutions, such as mental hospitals or asylums, on the advice of their own doctors. Government resources were slim to none and it was not until Lyndon Johnson signed the Social Security Amendments of 1965 that Medicare and Medicaid even came into existence in the summer of 1965.

Since this time, laws and government programs have expanded significantly, giving individuals with different abilities and their families myriad options, planning tools and resources to help create a better life and opportunities than were even possible just a handful of decades ago.

This article will explore the use of special needs trusts to help protect the needs, resources and well-being of individuals with disabilities and those in need of additional assistance. Establishing a special needs trust is often a critical step in ensuring that individuals with disabilities have the financial support they need without jeopardizing their eligibility for government benefits. This article explores the considerations and benefits of first-party and third-party special needs trusts.

What are Special Needs Trusts?

Special needs trusts (SNTs) are legal arrangements that allow individuals with disabilities to receive financial support without affecting their eligibility for government benefits such as Supplemental Security Income (SSI) or Medicaid. There are two primary types of special needs trusts: first-party trusts and third-party trusts. Each serves a unique purpose and is governed by different rules.

First-party Special Needs Trusts

A first-party special needs trust is funded with the assets of the individual with disabilities. This type of trust is often established when a person with special needs receives a settlement, inheritance or any other lump sum of money or is structuring their own assets to establish eligibility or maintain eligibility for means-tested governmental benefits, such as SSI or Medicaid.

Key considerations:

1. Medicaid payback requirement: First-party trusts must include a payback provision that requires the trust to reimburse the State for Medicaid benefits provided to the beneficiary upon his or her death. This can be a significant concern for families, as it means that any remaining assets in the trust will be used to repay the State before being distributed to any remainder beneficiaries.
2. Age restrictions: Some first-party trusts can only be created for individuals under the age of 65 at the time of establishment. Pooled trusts are a specific type of first-party trust that can be created for an individual over the age of 65, but this comes with other considerations and necessary steps to ensure the protection of the individual and his or her public benefits.
3. Legal requirements: First-party SNTs must comply with specific legal requirements under the Omnibus Budget Reconciliation Act (OBRA) of 1993. They must be established by a parent, grandparent, guardian or the court and with the passing of the Special Needs Trust Fairness Act in 2016, an individual can now establish his or her own first-party SNT, so long as he or she has the capacity to do so.

Benefits:

• Preservation of benefits: By placing assets in a first-party SNT, individuals can establish or maintain eligibility for essential benefits while having access to additional funds for their supplemental needs not otherwise covered by their public benefits.
• Flexibility in spending: The trust can cover a wide range of expenses not provided by government benefits, such as education, therapy and recreational activities.

Third-party Special Needs Trusts

A third-party special needs trust is funded with assets from someone other than the individual with disabilities, typically family members or friends. This type of trust is often used as part of estate planning to ensure that a loved one with special needs is financially supported after the grantor’s death.

Key considerations:

1. No payback requirement: Unlike first-party trusts, third-party SNTs do not require a payback to the State upon the beneficiary’s death. This allows remaining assets to be passed on to other beneficiaries.
2. Control of funding: Family members can choose how much to contribute to the trust and when, offering flexibility in financial planning.
3. Discretionary spending: Trustees have significant discretion in determining how trust funds are used, which can adapt to the changing needs of the beneficiary.

Benefits:

• Financial security: A third-party SNT can provide financial support for a loved one with special needs without affecting or jeopardizing their government benefits, ensuring a higher quality of life.
• Estate planning tool: It allows family members to provide for their loved one while ensuring that other heirs can also receive their intended inheritance without financial conflict.
• Continuity of care: Establishing a third-party SNT can ensure that funds are available for ongoing care and support, which can alleviate concerns about future financial instability, especially for those family members who have taken care of a loved one with disabilities their entire lives and are concerned about what happens next for that individual should something happen to them as their age or experience health or disability issues themselves.

Conclusion

Choosing between a first-party and third-party special needs trust involves careful consideration of the individual circumstances of the beneficiary and the family. First-party trusts are essential for those who receive direct assets and need to establish or maintain their government benefits, while third-party trusts offer flexibility and peace of mind for families planning for the future and for the future of their loved ones with disabilities. It is also important to note that perhaps a first-party and third-party special needs trust could be appropriate for a family, depending on the circumstances.

Consulting with a Certified Elder Law Attorney* (CELA) who practices regularly in special needs planning can help families navigate the complexities of these trusts and develop a strategy that best meets their needs and those of their loved ones with disabilities. Ultimately, establishing the right type of special needs trust is a crucial step in safeguarding the financial future and well-being of individuals with special needs.

*Certified Elder Law Attorney: Certification is not required to practice law in the State of Illinois. As of this writing, there are only 13 Certified Elder Law Attorneys (CELA) in the State of Illinois.