The Three Special Needs Trusts

The First-Party Special Needs Trust is best utilized when benefiting special needs individuals who currently qualify or will qualify in the future for public benefits that are made available to people with limited financial resources. First Party Special Needs Trusts allow assets to be put aside and categorized under supplemental expenses. This supplemental income can be used to pay for hobbies, education expenses, and other enrichment activities, but not for anything related to basic living requirements like food and housing as they are covered by third party agencies such as Medicaid.

The third-party trust is the most common type of special needs trusts. Estate planning attorneys often recommend this special needs trust to families in a variety of situations as it offers the most flexibility in terms of benefits packages and utilization. The third-party trust is a trust established by a parent for use directly by a child with a disability. What separates the third party trust from other special needs trusts is the fact that attorneys don’t have to take Medicare claims, liens, or age limits regarding the beneficiary, making it easier for the beneficiary to reap the full benefits of the trust. The Medicaid agency doesn’t require paybacks on the death of the beneficiary. Income from third party trusts should be distributed to pay for goods and services. One protective element this type of trust includes is the provision that the beneficiary doesn’t receive access to any assets in the trust. With that in mind, the estate planning lawyer has much more flexibility with the trust’s structure and can maximize the amount of income and tax goals of the will’s creator.

The pooled trust, also referred to as a (d)(4)(C) trust, is the most complex of the three special needs trusts. With this trust, instead of selecting a trustee to control the trust, the inheritance is managed by a non-profit organization as part of a group trust. These trusts are masterfully managed with a strong emphasis on efficiency and maximization of benefits. Assets are typically merged and funds are allocated on the beneficiaries proportionately to how much of the total they have. What makes these trusts more complex is that pooled trusts are highly variable and the process is not nearly as straightforward as the other trusts. Pooled trusts are never the same – having different fees, services available, and contract options available. Depending on the non-profit organization running the trust, strict selection criteria can be applied as well, which can be favorable or negative depending on individual circumstances. Each group can offer contracts and fee schedules of their choosing – some will elect to have one streamlined contract and others will have several equally complex agreements with a variety of options and add-ons. Like anything, pooled trusts do have limitations such as how expensive they can be, their lack of flexibility once the assets are put into the trust, limitations in what assets/investments they agree to hold, and the fact that the trust is only as good and efficient as the nonprofit that manages it.

Despite the complexity of pooled trusts, it does have some strong benefits:

1. Non-Profit organization trust managers have extensive knowledge and background in all areas regarding legal policies, Medicaid/SSI programs, and disability rights. This knowledge is extremely valuable and can make the process of creating a trust much easier in the long run and leaves less room for error.
2. People in the industry typically have direct ties to the local disabled community – friends, family members, coworkers who are disabled. Considering these managers have a vested interest due to personal concerns, they are much more attuned to the community.
3. Pooled trusts can offer additional benefits to special needs family members that you may not be able to offer

Like any trust, pooled trusts are expected to adhere to state guidelines, so pooled trusts often limit the range of clients residing only in the state it’s located in. There are several online resources that act as good starting points when looking for pooled trusts such as The Center for Special Needs Trust Administration and the National PLAN Alliance.

Each of these special needs trust options offer benefits for your loved ones. Careful consideration should be placed when reviewing each of these options and deciding which to proceed with. Working with an accredited estate planning attorney is always advised.