Navigating the world of special needs trusts can be overwhelming, especially with all the unfamiliar terms and legal intricacies involved. Whether you have a special needs trust, are a trustee, or your child is a beneficiary, understanding the basics is crucial. This article breaks down the essential terms and concepts related to special needs trusts. This article is sponsored by the tax professionals at the Law Office of Jason Carr. Contact the Law Office of Jason Carr.
What is a Trust?
A trust is a legal arrangement in which a trustee, who can be a person or a financial institution, holds and manages assets for the beneficiary. The trust document outlines the trustee’s authority, how the trust should benefit the beneficiary, and how and when it should terminate.
Special Needs Trust (SNT)
A special needs trust (SNT) helps preserve the beneficiary’s eligibility for needs-based government benefits such as Medicaid and Supplemental Security Income (SSI). Since the beneficiary doesn’t own the assets in the trust, they remain eligible for benefit programs with asset limits. The trustee typically supplements the beneficiary’s government benefits, covering costs for sitters, companions, and medical expenses not covered by Medicare or Medicaid.
Types of Special Needs Trusts
First-Party SNT: Funded with the beneficiary’s assets or income, such as from a personal injury settlement or inheritance. Federal law requires the beneficiary to be under 65 when the trust is created and funded, the trust must be irrevocable, and Medicaid must be reimbursed upon the beneficiary’s death or trust termination. Learn more about First-Party SNTs
Third-Party SNT: Funded with assets from someone other than the beneficiary, such as gifts, inheritance from parents or grandparents, and life insurance proceeds. This trust does not need to repay Medicaid upon termination, and the creator decides how the remaining assets are distributed when the beneficiary dies. Read more about Third-Party SNTs
Common Terms in Special Needs Trusts
Grantor: The person who creates and funds the trust. In first-party SNTs, the grantor is the beneficiary, but a parent, grandparent, legal guardian, or court must establish it. In third-party SNTs, the grantor is anyone other than the beneficiary.
Trustee: The individual or entity managing the trust assets and administering the trust provisions. Trustees can be family members, friends, professionals, or a combination.
Successor Trustee: Named in the trust agreement to take over when the initial trustee can no longer serve. They must meet specific requirements outlined in the trust agreement.
Beneficiary: The person for whose benefit the trust is established. The beneficiary must be classified as disabled by the Social Security Administration (SSA) for first-party SNTs.
Remainder Beneficiary: Individuals who receive any remaining trust assets when the trust ends, typically upon the beneficiary’s death. In first-party SNTs, the state’s Medicaid division is usually the first remainder beneficiary. In third-party SNTs, the grantor decides the remainder beneficiaries.
Compensation: Trustees are usually entitled to compensation for their services, set forth in state law. Professional trustees typically receive a fixed amount based on the trust’s value.
Trust Estate: Assets placed into the trust and managed by the trustee for the beneficiary’s benefit, including income earned from invested trust assets.
Schedule A: Identifies all assets owned by the trust. The trustee must keep this schedule up to date.
Types of Trusts: Irrevocable vs. Revocable
Irrevocable: Cannot be changed or revoked. All first-party SNTs must be irrevocable. Details on irrevocable trusts
Revocable: Can be revoked or changed by the grantor at any time. Only third-party SNTs can be revocable. Revocable trusts usually become irrevocable no later than the death of the grantor, if not sooner.
Other Important Terms
Testamentary: A trust created under a last will & testament and is not funded until the death of the person who created the will. A testamentary trust can only be a third-party SNT.
Inter vivos: A Latin term that means “among the living” or “during life.” An inter vivos trust is established during the lifetime of the person creating the trust. All first-party SNTs are inter vivos. An inter vivos third-party SNT can be revocable or irrevocable.
Disability: The beneficiary of a first-party SNT must have a disability recognized by section 1614(a)(3) of the Social Security Act. Complete list of SSA-recognized disabilities
Bond or Surety: At times, a trustee is required to obtain a bond, which provides protection to the beneficiary against the possibility of fraud, negligence, or loss of trust assets by the trustee. A bond is similar to an insurance policy in that if the trustee negligently or fraudulently lost trust assets, the bonding company agrees to pay a specified amount of money to reimburse the trust.
Accounting: The accounting is an explanation of the trust activity for a specified time period (usually a year). The accounting is prepared by the trustee, or an accountant or attorney hired by the trustee to prepare the accounting on the trustee’s behalf. The accounting can be simple or very detailed. It is important to review the language in the trust agreement to know what the accounting requirements are. For example, in addition to providing the accounting to the beneficiary, the trustee may need to file the accounting with the court, the Social Security Administration, or the state Medicaid agency.
Special needs trusts are complex. The language used in special needs trusts can vary greatly from one trust agreement to another and from Oregon to Oregon. It is essential for trustees and trust beneficiaries to understand the terms in the written trust agreement. A legal professional experienced in special needs planning can ensure that the trust document will meet the needs of the trust beneficiary, the person who is funding the trust, and the trustee who is administering the trust.
This article is sponsored by the tax professionals at the Law Office of Jason Carr. Contact the Law Office of Jason Carr. Call us at 888-661-6583 for assistance.
