CMP Financial Planning

Should I Establish a Special Needs Trust?


One of the most pressing questions special needs families face with their estate planning is whether to establish a Special Needs Trust (SNT). Because individuals with disabilities are living longer, there is a stronger likelihood that they will survive both of their parents, putting more emphasis on careful estate planning including the use of tools such as SNTs. For many families SNTs will be the cornerstone of their estate planning strategy. The key to answering whether to establish a SNT or not is having a good understanding of what you want the trust to accomplish.

Trusts allow family members to provide for their loved one after their death; however, in many cases, the assets in the trust will not be able to provide for the ongoing needs of a person with disabilities.   Therefore, protecting government benefits that are available to someone with special needs, namely Medicaid and Social Security benefits, will be a primary goal when establishing a SNT. These benefits will be the foundation of the care and support the individual will receive after the parent’s death. The SNT will provide for the supplemental needs of the individual.

Because SNTs represent a certain type of trust that carries unique benefits and stipulations, it is important that they be drafted by an estate planning attorney with a good working knowledge of Medicaid. A poorly written trust document that does not meet the approval of the Medicaid program could possibly disqualify your loved one from services. Often times your local county board of DD and/or the disability group can provide you with a list of attorneys in your area with this expertise.

In addition to the goal of protecting government services, three important questions to consider prior to the drafting of the SNT are:

If the answer to the first question is “No” and the assets set aside for the individual with disabilities is going to be less than $100K, the STABLE account may be sufficient to address the supplementary needs of the individual without the establishment of an SNT (for a full discussion see Disability Insights article on STABLE Accounts versus Trusts at http://conta.cc/2eJuMNA).

The answer to the second question will determine if a “First Party Trust SNT”, “Third Party SNT” or both types of trusts are necessary. First party trusts are funded with assets owned by the Beneficiary. These assets could come from events such as litigation proceeds, divorce settlements, Social Security back payments or savings from the individual. In the case of a first party SNT, upon the decease of the individual, proceeds of the trust will be used to payback Medicaid for the total amount of medical assistance provided.

On the other hand, Third Party SNTs are funded with assets of a person other than the person with special needs and no pay back of Medicaid is necessary. Upon the death of the individual, residual assets in the Third Party SNT may go to other beneficiaries named in the trust. The fact that Third Party SNTs do not have a payback provision is attractive to many families because it allows for the passing on of assets to more than just the individual with a disability.

Fees related to the establishment of the trust can range from $750 to $3000 depending on the market and the complexity of the trust document. Ongoing trust administration costs and taxes, however, can present a much bigger concern. Fees can range between 1-4% of the assets in the trust and may not be all inclusive. (For example, there may be separate tax preparation filing fees.) Taxation of trust income can be at marginal tax rate of up to 40% if the trust is a non-grantor trust (in many cases Third Party SNTs are non-grantor trusts). Because of the potential high costs of maintaining the trust, it may not be economical to establish a trust that is smaller in size (see discussion on STABLE Accounts Versus Trusts; http://conta.cc/2eJuMNA)

The third question “How trusts are managed after the death of the family member,” is an obstacle for many because parents are wary of passing along the responsibility of caring for their loved one. The “successor trustee” named in the trust document, that is the person or entity that has the authority to manage and distribute trust assets on behalf of the individual, is a critical appointment since that person will have full discretion as to how assets are managed or distributed upon the death of the parent. In the next Disability Insights article considerations in choosing a successor trustee will be discussed.

For many families Special Needs Trusts will be a key element in their estate planning strategy providing for their loved one with special needs. Having a trust document in place can provide peace of mind concerning their loved one’s future.

By Barry Jamieson