Another specialized tool that is employed to address the issue of excess income or resources is a Special Needs Trust (also known as a Supplemental Needs Trust, referred to as a "SNT"). Like an ABLE Account, moneys held in a SNT are not counted towards the resource test, and money deposited to them are not counted toward the income test for needs-based government benefits. Unlike an ABLE Account, funds invested in one of these trusts is taxable to the owner of the trust account (which person differs depending on the type of SNT), so there is no tax advantage to these types of trusts. But SNT's which are properly set up and administered permit a person with special needs to save, hold and invest money without violating the limitations imposed by the needs-based government programs like SSI and Medicaid.
There are two types of SNT's that differ primarily in the source of funds for the trust. A first party SNT is funded with funds of the individual with special needs (the beneficiary) usually from a medical malpractice award, personal injury settlement or inheritance from someone who did not set up a first party SNT for the individual prior to their passing. In addition, an issue that frequently arises is that child support payments ordered into a trust of this type do no count as income to the adult child. The first party SNT can be a very useful tool for this situation. A third party SNT is funded with moneys donated or gifted either during the donor's lifetime or upon their passing. These funds can result from life insurance proceeds, retirement accounts or other savings.
The rules for a first party SNT are more restrictive and cumbersome than for a third party SNT, but the most persuasive reason to avoid having to use a first party SNT is the Medicaid payback provision. Like an ABLE Account, a first party SNT must provide that any money remaining in the trust upon the beneficiary's death must first be used to reimburse Medicaid for any benefits provided to the beneficiary during his or her lifetime. Conversely, a third party SNT can provide that remaining moneys be left to other family members without regard to Medicaid benefits extended to the beneficiary. There are additional differences between these trusts including age limitations, revocability of the trust, and sole benefit requirements. These are issues we can discuss when planning your estate. Contact us at (214) 296-2025 to learn more.