Trusts for Disability and Special Needs Planning
Disability planning is becoming more and more important, especially when dealing with a child with special needs or a disabled adult who cannot manage his or her finances. The preferred method for handling these situations is with trusts. There are so many different kinds of trusts today, though, you will need to know what kind of trust works best for your situation.
A trust is an agreement between the person who creates the trust and the trustee, to manage assets that are titled in the name of the trust for the benefit of the beneficiary in accordance with the terms of the trust agreement or Will that is used to create the trust.
Trusts come in many flavors, but there are two important distinctions that need to be understood to help you decide what kind of trust works for you with regard to disability planning.
One distinction is between a trust that is set up now (a “living trust”) versus a trust that comes into existence upon your passing (a “testamentary trust”).
Living Trust. A living trust is a trust that you put into effect now when you need to provide for a disabled person. It may be that your parents would like to make a contribution for your special needs child. Or, maybe, someone in your family who is receiving Medicaid benefits is about to inherit some money that needs to be sheltered so that it does not disqualify that person from receiving those governmental benefits. In these cases, a trust agreement is needed now to meet specific needs.
Testamentary Trust. A testamentary trust comes into effect upon your passing. It is very helpful when your beneficiaries (children, grandchildren or even parents) are persons that require help to manage their assets responsibly because of their disability. This is a trust that will be needed in the future when you are no longer available to provide support.
The second distinction is between a “first party trust” and a “third party trust.”
Third-Party Trust. A third-party trust is a trust set up by one person for the benefit of another. A parent setting up a children’s trust under his or her Will, or a grandparents setting up a living trust to benefit their grandchildren would be examples.
First-Party Trust. A first-party trust is a trust set up by one person for that person’s own benefit, using that person’s own assets. This often happens with a person receives an inheritance or settles a claim based on someone else causing that person’s disability (e.g. a car accident or medical malpractice), and receiving those assets would disqualify that person from receiving governmental benefits (e.g. Medicaid and SSI). Wealthy individuals use this type of trust, in limited situations, to protect their own assets from their creditors.
With this background, the proper trust for disability planning can be designed.
Third-Party Special Needs Trust (SNT). With a SNT, a parent, grandparent, relative or even a court can set up a trust (living or testamentary) for the benefit of a disabled person, and can set conditions on the use of the trust assets to benefit the disabled person. Most often, spendthrift provisions are included to protect the trust assets from the creditors of the disabled person, such as Medicaid. This is the core concept for most SNT situations.
First-Party Special Needs Trust. Occasionally a disabled person comes into money that would otherwise disqualify that person from receiving Medicaid or SSI benefits. That person cannot just set up an SNT without triggering the 5-year look-back period for transfers subject to penalty. So, Congress allows for what are called “pay back” trusts that a person can use to protect one’s own assets. These are “first-party living trusts” that include special needs provisions.
One trust, the d4(a) trust (so named because that is the section of US Code that contains the provisions), allows a person to set up a first-party, living trust that complies with federal and state law (as determined by review by the Attorney General’s office), and includes what are called “pay back provisions.” These provisions require that, upon the death of the beneficiary, Medicaid must be reimbursed for benefits paid up to the lesser of (i) the amount actually paid and (ii) the value of the assets held in the SNT. In this way, a person can receive some nice benefits from having received some property, but the government can be reimbursed if anything remains in the SNT upon the death of the beneficiary.
The other trust, called the d4(c) trust, is a pooled trust designed for situations where there are not many assets involved. In this situation, a disabled person can transfer the assets they received to the trustee of a pooled trust. In Maryland, First Maryland Disability Trust is an example. This trust works the same way as the d4(a) trust, but due to the relatively small amount of assets, a common trustee for many beneficiaries is used.
The proper use of trusts in disability is critical to successful financial planning for disabled children or adults. As always, the more one understands how these trusts can be used, the better the needs beneficiaries can be managed well into the future.
To learn more about what you may need contact, Michael Davis at firstname.lastname@example.org or call 410.995.5800.
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