In essence, a Special Needs Trust is an instrument created to protect the assets of someone who is disabled and is/will be receiving public assistance. By placing the assets in this trust, the disabled person can still receive the benefits of those assets and still maintain eligibility for public assistance.
The special needs trust is usually created by one of two persons. In the first instance, the parents of a disabled child (usually called third party special needs trust) might incorporate a special needs trust into their estate plan. The estate plan automatically places the inheritance their disabled child receives into the special needs trust. In the second instance, the disabled person might create the special needs trust themselves upon receiving a gift, inheritance, or personal injury award that might other otherwise disqualify them from receiving public assistance.
The special needs trust is an irrevocable trust, so the creator has no control over it and the disabled person has no discretionary control. Instead, a trustee has discretionary control over the assets and must use sound fiduciary duty to utilize assets in the trust when they are necessary. Because the benefactor of the trust is disabled, they are usually on some type of public assistance that they would normally be disqualified from receiving if they had control over assets. By placing the assets in an irrevocable trust, the child or disabled person retains the benefits of the trust without disqualifying themselves from public assistance.
A special needs trust works great for Medicaid Planning and Social Security Disability purposes because the beneficiary is not considered to own the assets in the trust. Thus, it is usually not a disqualifying event for Medicaid eligibility purposes. At the death of the disabled person, the trust contains language which provides for payback of costs by the trust to the state for the cost of the public assistance. The special needs trust must be carefully drafted to include specific language which does not disqualify the disabled person from receiving public assistance.
There are several reasons why this could be an extremely valuable instrument. In particular, by placing assets in the trust and avoiding the depletion of those assets to pay for care of the disabled person (i.e. public assistance will pay for the care instead) the public assistance acts as a kind of interest free loan. Thus, if the assets in the trust are carefully invested, there may be substantial amounts left over even after public assistance is reimbursed upon the death of the disabled person.
