A special needs trust is a trust designed to hold money or property for someone who gets SSI or Medicaid (or any other means-tested public benefit). The important thing is that the money in the special needs trust does not count as a resource available to the person who gets SSI or Medicaid. In other words, it doesn’t count against the strict $2,000 limit the person must stay under to keep getting those benefits.
Like any trust, special needs trusts have a grantor, a trustee, and a beneficiary. The grantor (or settlor) is the person whose money or property goes into the trust. The trustee is the person who holds and manages the property while it’s in the trust and makes decisions about how it is used. The beneficiary is the disabled individual or person who gets SSI or Medicaid—the trust must be managed and used for this person’s benefit.
Two types of SNTs
There are two basic types of special needs trusts: first-party and third-party. A first-party special needs trust holds money or property that was owned by the beneficiary. First-party trusts all have a Medicaid payback provision: anything remaining in the trust when the beneficiary dies must pay the State back for the Medicaid benefits it paid out. Third-party trusts, on the other hand, hold money or property that came from a third party—someone other than the beneficiary—and do not have to pay the State back for Medicaid. The amounts remaining in third-party trusts when the beneficiary dies go to whoever the third party chooses.
A classic example of a first-party special needs trust is the Wispact Trust I account established by a man who gets SSI and just received a $30,000 check from his uncle’s estate. That $30,000 is legally his money as soon as he has the check in hand (even before it’s cashed). Because he will have more than $2,000 at the start of the next month, he will lose his SSI if he doesn’t do something quick. So he works with an attorney to put that money into an account in Wispact Trust I, which is a first-party special needs trust. The money then no longer counts towards the $2,000 limit and he will keep his monthly SSI benefit (and the Medicaid he gets along with it). He can then request a distribution from that $30,000 for things he needs or wants that SSI or Medicaid don’t cover. If the money isn’t all spent before he dies, the remainder will have to reimburse the State for Medicaid benefits.
A good example of a third-party special needs trust is the trust established by the parents of an adult disabled child. As part of their estate planning, they work with an attorney who drafts the special needs trust as a separate, standalone document. After it’s executed, the trust can be named as beneficiary instead of the disabled child in the parents’—and other family members’—estate plans. Because the trust holds the child’s share of the estate, his or her SSI and Medicaid benefits are never threatened. A trusted family member or professional can manage the trust and use it as needed for the disabled child. After the child dies, there’s no payback to the State. The parents’ other children (or whoever they name) can get what’s left.
Subtypes: private vs pooled SNTs
Although the most important distinction among special needs trusts is between first-party and third-party trusts, either type can be subdivided into private and pooled trusts as well.
A private special needs trust is one custom-drafted by an attorney for one individual or family; it’s what most people think of when they think of getting a trust. The person creating the trust can choose who will be trustee, how the trust will work, and who will get the remainder.
Special needs trusts that are both first-party and private are sometimes called (d)(4)(A) trusts. That’s a reference to the section of federal law that says these trusts are not counted when determining eligibility for SSI or Medicaid: 42 U.S.C. § 1396p (d)(4)(A). That law exempts trusts that:
- Contain the assets of an individual under the age of 65 who is disabled (under the Social Security “unable to do any substantially gainful activity” definition);
- Are established for the benefit of the individual;
- Are established by the individual, a parent, grandparent, legal guardian, or a court; and
- Pay all amounts remaining in the trust at the individual’s death to the State (up to the total amount the State paid in Medicaid benefits for the individual).
A pooled special needs trust is one master trust created and managed by a central entity that “pools” the resources of many individual beneficiaries. This makes it more economical. Instead of having to hire an attorney to draft a custom trust, individuals can use the already-existing pooled trust. They do this by executing a contribution agreement and establishing a sub-account to hold their money. They get less control over the terms of the trust, but in exchange they get a professionally managed trust at an accessible price.
In Wisconsin, the best example of pooled trusts are those established and managed by Wispact, Inc., a nonprofit based in Madison. Wispact maintains both a first-party pooled trust, called Wispact Trust I. and a third-party pooled trust, called Wispact Trust II.