According to the U.S. Census Bureau, about 10% of Americans between the ages of 16 and 64 suffer some form of physical, mental or emotional impairment. Many of them are outliving their parents and caregivers thanks to improved medical technology. Caring for a person with special needs can often be a huge financial burden, especially if the person is not able to support himself or herself, which is why many people with special needs receive government benefits. In order to be eligible for government benefits (such as Medicaid and Supplemental Social Security), a person must meet strict income and resource eligibility criteria.

Problems can arise when a person who is receiving government benefits, receives money or assets from an inheritance or lawsuit settlement. This unexpected influx of financial resources can cause them to become ineligible for government benefits. This is where a special needs (sometime called a supplemental needs) trust comes in. A special needs trusts allows for a person with special needs to supplement the benefits they already receive from government programs, without losing their eligibility. There are three different types of special needs trusts - first party trusts, third party trusts, and pooled trusts.

First Party Special Needs Trust. A first party special needs trust is useful for a person who has already received a large inheritance or accident settlement. Someone other than the person with special needs (who is referred to in the trust as the beneficiary), creates the first party trust, typically a parent, grand parent, or court. The beneficiary’s assets fund the trust, and the funds are used for his benefit during his life.  When the beneficiary dies, any funds remaining in the trust are paid to the government as reimbursement for the beneficiary’s medical care.

Third Party Special Needs Trust. The family of a special needs person often creates a third party trust to provide the person with additional financial support. A third party trust can be funded with a wide variety of assets that belong to the family or another person. The funds from the trust can be used to pay for the beneficiary’s care, just like under a first party trust. One significant difference between a first party and third party trust is how the remaining funds are handled after the beneficiary dies. In a third party trust, the funds are not used to reimburse the government for the beneficiary’s medical care. Instead, the funds can pass to family members or charity.

Pooled-Trusts. A pooled trust is an alternate to a first party special needs trust, and is set up by a charity, not by the beneficiary or his family. Under a pooled trust, several beneficiaries pull their resources together for investment purposes. Each beneficiary maintains a separate account under which they receive funds during their life. Once the beneficiary dies, the remaining trust funds are paid to the government as reimbursement for the beneficiary’s medical care. The non-profit who managed the pooled trust will also receive a portion of the funds.

Special needs trusts are extremely important for families with children who have special needs, but also for elderly people who are attempting to qualify for long-term care coverage through Medicaid. They can transfer their assets into a properly drafted third-party special needs trust for the sole benefit of a person with disabilities without incurring a transfer-of-assets penalty, allowing the elder to qualify for Medicaid and making sure that the person with disabilities is taken care of in the future.

If you or someone you know, has a need for a special needs trust, they should contact a qualified estate planner to discuss their options and select the correct trust for their needs. It is important to contact someone who is familiar with these types of trusts, because often times they must meet strict legal criteria to be qualified as special needs trusts.

• See, “What is a Special Needs Trust“, Special Needs Answers, Academy of Special Needs Planners, September 1, 2009. Available at:
  http://www.specialneedsanswers.com/resources/article.asp?id=19006&section=4&state=
• See, “Financial Planning for Kids with Special Needs“, Scott Reeves, Forbes.com, April 4, 2005, Available at http://www.forbes.com/2005/04/11/cx_sr_0411kids.html