Funding a Special Needs Trust
Special Needs Trusts may be funded with assets belonging to the disabled individual (referred to as a "self-settled" Trust), or with assets belonging to a third party (such as a parent establishing a Trust for the benefit of a disabled child, referred to as a "third party" Trust.)
The Beneficiary Must be Disabled
The beneficiary of any Special Needs Trust must be disabled, which is defined by the applicable regulations to mean "unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment, which can be expected to result in death, or has lasted or can be expected to last for a continuous period of not less than twelve months." A minor meets the definition of disabled if he or she suffers from a medically determinable physical or mental impairment of comparable severity.
Other Restrictions on a Special Needs Trust
Other restrictions apply to both "self-settled" and "third party" Special Needs Trusts. For example, the beneficiary can have no control over assets held by the trust, and there must be an independent trustee with the sole discretion as to the timing and amount of disbursements. Also, any trust funds paid to the beneficiary directly, or used to pay for goods or services not considered to be "special needs" under the regulations, will be deemed to be income to the beneficiary, resulting in a temporary or permanent loss of the government benefits. However, the trust funds can be used to pay third parties directly for goods and services not covered by the government benefits.
Conditions on Creating a Special Needs Trust
Additional conditions apply to "self-settled" Special Needs Trusts; most notably, the Trust must be created by a court or qualified family member on the beneficiary's behalf; the beneficiary must be under age 65 when the Trust is created; and the Trust must provide that any Trust assets remaining after the beneficiary's death will first be used to reimburse the State for Medicaid benefits paid to the beneficiary during his or her lifetime.
A Medicaid Payback Provision
No such Medicaid's payback provision is required in "third party" Special Needs Trusts funded with assets belonging to someone other than the beneficiary. A "third party" Special Needs Trust may be created after the Trustor's death pursuant to his or her Will and, unless the beneficiary is the spouse of the Trustor, a "third party" Special Needs Trust may also be created pursuant to a Revocable Living Trust or as a stand-alone "inter-vivos" Trust. One advantage to an "inter-vivos" Special Needs Trust is it permits the Grantor to verify that the Trustee they have selected is doing a good job.
Special Needs Trust Commonly Created By
It is common for parents to create a "third party" Special Needs Trust for a disabled child with assets belonging to the parents. It is also common for a husband or wife with an ill spouse who is likely to need long term care to create a "third party" Special Needs Trust in his or her Will for the benefit of the ill spouse, to be funded with the healthy spouse's share of the marital assets.
A Special Needs Trust can be useful following Catastrophic illness or injury
A "self-settled" Special Needs Trust can be useful when a healthy individual suffers a catastrophic illness or injury requiring long-term or lifelong nursing care. If the individual is under age 65 and the other requirements discussed above are met, the disabled individual's savings and other assets can be put into a Special Needs Trust to render the individual immediately eligible for government benefits to help pay for his or her care.