A special needs trust can be created through a living trust or as a testamentary trust created through a last will and testament. When established and managed correctly, a special needs trust can significantly improve the quality of life for someone with special needs. This page is intended only to provide general information regarding special needs trusts in Utah, and should not be considered as legal advice. For assistance in creating a special needs trust, contact us today to see what the right attorney can do for you.
Purpose of a Special Needs Trust
The general purpose of a special needs trust is to provide supplemental assistance and care, beyond the traditional HEMS (health, education, maintenance, and support), for an individual with special needs who qualifies for needs-based government benefits such as Medicaid and Supplemental Security Income (SSI), without disqualifying the individual from eligibility to receive such government benefits. When properly titled, designated, and administered, assets held in a special needs trust can be used to improve trust beneficiary’s quality of life while still allowing the individual to receive needs-based government benefits intended to provide for the basic necessities of life. Proper establishment and management of the trust is critical to maintaining eligibility for government benefits and ensuring that the grantor’s intent will be accomplished.
Types of Special Needs Trusts
There are two main types of special needs trusts, self-settled or first person trusts and third party trusts. A third, less common type of special needs trust is sometimes referred to as a “sole benefit” trust.
SELF-SETTLED or FIRST PERSON TRUST – “Self-settled” special needs trusts are established by the beneficiary or by someone acting on the beneficiary’s behalf using the beneficiary’s funds with the goal of retaining or obtaining public benefits eligibility. The funds for this type of trust can come from an inheritance, a lottery win, or most commonly, proceeds from a lawsuit. A self-settled trust must include a provision directing the trustee, if the trust contains any funds upon the death of the beneficiary, to pay back anything the state Medicaid program has paid for the beneficiary. Also, in most states the rules that govern the distributions for self-settled special needs trusts are significantly more restrictive than those controlling third-party special needs trusts. “Because Social Security law specifically describes self-settled special needs trusts, these instruments are sometimes referred to by the statutory section authorizing transfers to such trusts and directing that trust assets will not be treated as available and countable for SSI purposes. That statutory section is 42 U.S.C. §1396p(d)(4)(A), and so self-settled special needs trusts are sometimes called, simply, “d4A” trusts.”
THIRD PARTY TRUST – A “third-party” special needs trust is set up by someone, like a parent, using assets that never belonged to the beneficiary. With proper planning, a third-party special needs trust can be used to hold an inheritance or gift. (Without proper planning, a well-meaning family member might simply leave an inheritance to an individual with a disability. Even though the funds came from a third party, the funds will have been available to the beneficiary, thus the trust will be a “self-settled” special needs trust.) A third-party special needs trust does not have a payback provision and the kinds of payments are usually more generous and flexible.
SOLE BENEFIT TRUST – Another type of special needs trust that is rarely used is a “sole benefit” trust. Under Medicaid rules applicants are permitted to make unlimited gifts to or “for the sole benefit of” disabled children or spouses. Some individuals with assets may choose to establish this type of special needs trust for a child or grandchild with disabilities hoping to secure Medicaid eligibility for both themselves as grantor and for the disabled beneficiary. Most state are highly restrictive in their interpretation of the “sole benefit” requirement. This type of trust is taxed and treated as third-party trusts in many respects, but require a payback provision like self-settled trusts.