What is a Special Needs Trust? By Adara Opiola*

*Case Law Ltd. Extern and University of Iowa Law Student, Class of 2024

A Special Needs Trust (“SNT”) is a trust that allows a person with a disability to be the beneficiary of sums of money without losing his or her eligibility to government assistance. Further, “[f]or purposes of drafting Special Needs Trusts, the term ‘special needs’ is often used interchangeably with the terms ‘supplemental needs’ or ‘supplemental care.’” Kristen M. Lewis, Planning for Beneficiaries with Special Needs, Am. Legal Inst. 155 (2017). The primary goal of an SNT is to maintain a beneficiary’s eligibility for “means-tested” government assistance while owning valuable assets or money; this often includes Social Security and state Medicaid. Id.  Generally, there are two overarching types of Special Needs Trusts: first-party SNTs and third-party SNTs. 42 U.S.C. § 1396p(d)(4) is the federal statute that outlines the differences and requirements of each type. Id.

If a medical assistance program assists in the costs of injuries that resulted in a lawsuit, the assistance program will “withhold” the costs in order to get payment from a negligent third-party. For example, if someone gets in a car accident and breaks their arm, the medical center that treats the injured party will have a medical lien on any settlement for the car accident to cover the costs to treat the injury. This lien allows the parties involved in the accident to come to a settlement before those medical costs must be paid and is an important point of negotiation among the parties. Deborah Tussey, Personal injury recovery as affecting eligibility for, or duty to reimburse, public welfare assistance, 80 A.L.R.3d 772 (2021). Further, it is important to consider who would be the best trustee for the particular situation at hand. In some situations, it may be a good idea for the trustee to be an outside, third-party and not someone that the beneficiary knows well. Trustees oversee how the funds are used and approve the allowances given to the beneficiary, and this fiduciary relationship can create tension in close, personal relationships because the trustee must tell the beneficiary “No” if he or she wants to use the funds inappropriately. Not only may it be difficult to tell a loved one “No”, but it may create poor relations between the trustee and the beneficiary and put added pressure on the trustee to make unbiased and difficult decisions. By contrast, if the beneficiary is taken care of entirely by another person close to him or her, a third-party trustee may result in extra steps for the caretaker when the caretaker can manage the funds on his or her own. Because of this, the best choice for a trustee is case dependent.

First-Party Special Needs Trusts

A first-party SNT is for individuals with disabilities under the age of 65 who already possess a sum of money or valuable asset(s) to prevent the individual from losing their eligibility for public aid. A common use of first-party SNTs is to handle settlement funds after the individual with the disability has been injured, or to handle funds received through an inheritance.

A first-party SNT may be set up by the individual or the individual’s guardian so long as when the individual dies, the state will receive all remaining amounts equal to the total medical assistance that the State has given to the individual. For example, if the individual with the disability dies with $0 left in their first-party SNT, the state does not receive anything from the individual’s estate. By contrast, if the individual dies with $50,000 in their first-party SNT, then the State will take the amount of public assistance given to the individual out of whatever is left. If the amount of public assistance exceeds $50,000, then the State will only take what is left over, and the estate does not have to pay back more than what is left in the trust. In other words, when the beneficiary dies, the medical assistance providers will be reimbursed for the benefits paid to the beneficiary under state Medicaid. Id. However, jurisdictions differ on whether the amount repaid should be for the medical assistance paid to the individual throughout their lifetime or when the trust was created. See In the Matter of Abraham XX, Deceased v. State of New York, 11 N.Y.3d 429 (2008). Because SNTs allow for large sums of money to be responsibly used and cared for, people should not be deterred from giving an inheritance through this outlet.

Third-Party Special Needs Trust

A third-party SNT is a trust with no age parameters in which another party has provided funds for the individual’s benefit to use on medical and living expenses. In contrast to the first-party SNTs, third-party SNTs are not under statutory authority and do not have to reimburse the state for medical assistance given to the beneficiary. For example, if an individual’s brother would like to set aside $100,000 for the individual to use, a third-party SNT would be created. Additionally, if there were funds in the account when the beneficiary died, there is no requirement to reimburse the state for aid received.

Pooled Special Needs Trust

A Pooled SNT may be used to establish either a first-party or third-party SNT, but it is established and administered by a non-profit organization. With Pooled SNTs, beneficiaries will have a separate account in which the funds of the trust are added, which money is approved and added to the account by the non-profit organization. For example, a beneficiary may have $50,000 in a trust but will have to ask the trustee to transfer money to a separate account that the individual has a debit card attached to. The Pooled SNT can be an excellent option because there is a third-party trustee and the amounts used at a given moment are smaller than having access to the entire trust. Special Needs Alliance, https://www.specialneedsalliance.org/the-voice/two-different-types-of-special-needs-trusts/ (last visited Feb. 27, 2022).

Here are some important questions to ask if you are considering a Special Needs Trust:

  • Whose money is supplying the Special Needs Trust?
  • Does the beneficiary have a caretaker?
  • How independent is the beneficiary?
  • What is the maturity level of the beneficiary?
  • Does the beneficiary want to have a personal relationship with his or her trustee?
  • How should the money be used?

Overall, a Special Needs Trust may be an appropriate way for a loved one to be taken care of by a sum of money and remain eligible for public assistance. The type of trust necessary depends on how the beneficiary will obtain the money, who the most appropriate trustee would be, and if a separate account attached to a debit card would be the most convenient option for the beneficiary.