Thought Leadership on Accounting and Finance presented by CliftonLarsonAllen.
Trusts are popular tools in financial and estate planning because they can help protect and manage assets for a variety of purposes. A special or supplemental needs trust (SNT) is a specific type of trust that focuses on providing financial support to elderly or disabled persons. An SNT can supplement their standard of living without jeopardizing the government benefits they receive.
There is more than one type of special needs trust. They can differ in their funding source, set up, administration and taxation, but the common purpose is to contribute to and enhance the beneficiary’s quality of life.
Maintaining SSI and Medicaid
Elderly and disabled individuals often receive a number of government benefits including Supplemental Security Income (SSI) and Medicaid. These are both “means-tested” programs, meaning that a person’s income and assets are considered when determining if he or she qualifies.
If property is given outright to the individual, that additional income or assets could put him or her over the program’s qualification threshold. The requirements for Medicaid vary by state, while SSI is a federally regulated program. They both restrict asset transfers to others and/or trusts, but there is an exception carved out for SNTs.
Instead of a direct transfer, an SNT can be set up for an individual’s benefit and structured in such a way that the trust assets aren’t taken into account for purposes of government program qualification. This planning can be appropriate for individuals currently receiving benefits or for someone who may need benefits in the future.
What a special needs trust can pay:
- Certain medical treatments not covered by Medicaid
- Travel and special transportation
- Personal items
What a special needs trust cannot pay:
- Other benefits provided by any governmental assistance program
First party special needs trust
A first party SNT, also known as a “self-settled trust,” is funded with assets or income that belongs to the beneficiary. These trusts are commonly funded with inheritance or proceeds from a personal injury lawsuit.
This type of SNT is an irrevocable trust that must be established when the beneficiary is under age 65. It must provide that Medicaid be reimbursed upon the beneficiary’s death or trust termination, whichever occurs first. No payback is required for SSI benefits received during the beneficiary’s lifetime.
A parent, grandparent, legal guardian, or a court, must establish a first party SNT, and it can have only one beneficiary.
First party SNTs are usually taxed as grantor trusts since the beneficiary (grantor) retains interest in the assets he or she transfers to the trust. With a grantor trust, the beneficiary is taxed on the income of the trust versus the trust paying the tax.
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