There are two types of special needs trust. The first type is a self-settled trust, also known as a d4A trust named after the federal code which regulates them. The federal code that regulates them is 42 U.S.C. §1396p(d)(4)(A). A self-settled trust is a trust that is created by the disabled individual. Many times these trusts are created because the disable individual received directly an inheritance, sale of home, divorce, obtains a settlement or payout in a personal injury lawsuit, or maybe even won money in a lottery or gambling. In order for that disabled individual to obtain or keep the public assistance they need to create a trust for themselves within a certain amount of time (usually 30 days) of receiving the money.
There are key factors that set this type of trust apart. One key factor is that when the disabled individual passes away there must be a provision in the trust that the state Medicaid program will be paid back for any funds that were paid out on behalf of the disabled individual. The second key factor is that the funds held in the trust may only be dispensed for certain items depending on the public assistance the individual is receiving. Many times food and shelter payments given to the disabled individual or paid on behalf of the individual will be considered income and they will receive less public assistance. The third key factor is that the trust must only be for the benefit of the disabled individual and the funds can’t be paid directly to that individual (like cash or check).
A second type of trust is called a third-party special needs trust. This type of trust is created by someone else other than the disabled individual. The key with this trust is that the disabled individual never received the assets before the assets are put into the trust. This type of trust is used when establishing an estate plan where one of the beneficiaries would be a disabled individual. Instead of giving the assets directly to the disabled individual the assets are transferred to the trust for the disabled individual’s benefit. As mentioned before, the trust should not be paying any income to the disabled individual or any items that are considered for their shelter needs. With a proper estate plan, these trust allow a disabled individual to maintain their public benefits without a requirement that any assets remaining in the trust after the disabled individual passes away go to payback the state for Medicaid payments. This mean the person who creates the trust can name another individual as a beneficiary after the disabled individual passes away.
Above it was mentioned, that funds from the trust should not pay income to the disabled individual or for the disabled individual’s shelter cost. Some of these shelter costs or items include: food, mortgage, property insurance, property taxes, rent, heating, gas, electricity, water, sewer, and garbage remover. Normally a special needs trust is able to pay for clothing, phone, cable, internet services, vehicle (and maintenance and insurance), education/books, funeral arrangements, travel/entertainment, household furnishing, furniture, television, computer, electronic, etc. It is always better to review the current federal and state laws of the disabled individual then to make a payment which might cause a disabled individual to loss their public assistance.
The trustee has a very hard job. The trustee will need to keep up on all the changes in the laws that determine what a disable individual can receive from the trust so that they will not lose their public assistance. Also, the trustee will need assistance to determine how to administer the assets, the terms of the trust, and the best way to invest those assets. A special needs trust is one in which the creator of the trust and the trustee will need assistance from an attorney, tax accountant, and maybe even a financial advisor.