Special Needs Trusts

A Special Needs Trust lets you provide for someone with special needs, without jeopardizing their eligibility for public benefits.

A family member with special needs presents a unique estate planning challenge. By virtue of their special needs, family members often wish to provide for them through lifetime gifts and eventual inheritances.

However, such individuals often rely on government benefits, such as Supplemental Security Income (SSI) or Medicaid (called MassHealth in Massachusetts). Because these public benefit programs typically base eligibility on financial criteria, an outright gift or inheritance can have the unintentional effect of kicking the special needs person off of their benefits.

Thankfully, Special Needs Trusts (also called Supplemental Needs Trusts) allow us to provide for our loved ones with special needs, while preserving their public benefit eligibility. Special Needs Trusts do this through customized provisions that direct the Trustee to use the trust’s funds for the supplemental needs of the beneficiary. The concept is that because public benefits are designed to pay for the primary needs (food, shelter, clothing) of the individual, then a trust that provides for only supplemental needs shouldn’t effect their eligibility.

There are two main types of Special Needs Trusts: the Third Party Supplemental Needs Trust, and the First Party Special Needs Trust (also called a (d)(4)(A) Trust).

The Third Party Trust is funded with assets that do not belong to the person with special needs. Instead they are usually funded by their parents, grandparents, or other family members. Because the trust funds never belonged to the beneficiary directly, they can be used for his or her benefit during their lifetime, and then pass to the remainder beneficiaries at death.

A First Party Trust is funded with assets that belong to the special needs person. Because it contains the beneficiary’s own funds, the trust must contain payback provisions. Therefore, the trust can provide for the beneficiary during their lifetime, but upon their death it will have to reimburse Medicaid for any benefits received by the beneficiary. This requirement is embodied in 42 U.S.C 1396p(d)(4)(A), which is why first party trusts are sometimes called (d)(4)(A) Trusts.

Because first party trusts contain payback provisions, and third party trusts do not, it is preferable to use third party trusts if possible. Still, when circumstances require, both types of trusts are valid estate planning options.

There are also Special Needs Pooled Trusts (called (d)(4)(C) Trusts), which are administered by non-profit companies, and are similar to (d)(4)(A) Trusts, with some eligibility advantages for older individuals.