By Kevin Urbatsch, Esq., and Jessica Jones, Esq.
A third-party special needs trust (SNT), also called a third-party supplemental needs trust, is commonly utilized to hold and administer an inheritance for a person with a disability. It can also facilitate gifts or donations to the beneficiary with a disability. It is important to note that creating an SNT is only one part of a plan for a person with a disability. Special needs planning requires a comprehensive approach to address all the needs a person with a disability requires. The authors often discuss with parents that a special needs plan is designed to create a strategy to replace everything they do for their loved ones with special needs. This generally involves planning to ensure that there is someone to make medical or personal care decisions for the loved one with a disability, a suitable living arrangement (whether private, group home, or skilled nursing), a sustainable caregiving arrangement, appropriate transportation, opportunities for social interactions, proper advocacy, and enforceable protection from predators. This article will focus on the third-party SNT, a vital element of a comprehensive special needs plan.
Drafting a third-party SNT involves careful planning and a deep understanding of legal requirements and the beneficiary’s needs. Here are some tips to help practitioners create effective and comprehensive third-party SNTs that provide essential protections and benefits for individuals with disabilities.
Stand-Alone or Testamentary SNT
There are two ways to establish a third-party SNT: as a testamentary third-party SNT drafted as part of an existing living trust or will or as a living (inter vivos) third-party SNT in a stand-alone document. The authors strongly recommend drafting a stand-alone living third-party SNT because it offers many more benefits to the person with a disability and the client establishing it.
A testamentary third-party SNT is only created after the people who set it up die. It does offer some advantages: the drafting may be more straightforward, it is typically less expensive to create, and it reduces the number of documents comprising a client’s estate plan. However, there are some significant disadvantages; for example, if parents establish their own living trust and leave a share of their estate to an SNT within their living trust for the benefit of their child with a disability, grandparents who want to leave assets to their grandchild with a disability must create their own third-party SNT because the parents’ third-party SNT will not exist until both parents have died.
The living third-party SNT, on the other hand, is drafted as a stand-alone document and is immediately effective; this allows it to receive inheritances from others who wish to leave assets to the person with a disability. In addition to allowing multiple sources to fund the trust during the settlor’s lifetime, a living third-party SNT may be designed specifically to maintain the beneficiary’s privacy.
Legal Requirements for a Third-Party SNT
The legal requirements for a third-party SNT are relatively straightforward. According to the Social Security Administration’s (SSA’s) Program Operations Manual System (POMS), which serves as its operational reference guide, a third-party trust is defined as “a trust established with the assets of someone other than the beneficiary,” and a grantor is defined as “the individual who provides the trust principal (or corpus).” For the trust beneficiary to qualify for Supplemental Security Income (SSI) benefits and to ensure their continued eligibility for benefits, the trust must meet the following criteria:
- The beneficiary cannot have the authority to revoke the trust.
- Under the terms of the trust, the beneficiary cannot direct the use of trust assets for their own support and maintenance.
The revocability of a trust and the ability to direct the use of the trust principal depends on the terms of the trust agreement or state law. If a trust is irrevocable by its terms and under state law and cannot be used by an individual for support and maintenance, it is not a resource for SSI eligibility purposes. A revocable third-party SNT can also meet SSI eligibility requirements if the beneficiary does not have the power to revoke it.
In addition, the SSA will treat a third-party SNT as a countable resource against the trust beneficiary for SSI eligibility purposes if the trust document requires disbursements for a beneficiary. The SSA’s POMS includes a specific example: If the trust contains $50,000 that the trustee can pay to the beneficiary only if they need a heart transplant or on their hundredth birthday, the entire $50,000 could be paid to the beneficiary, and the trust is therefore considered a resource for SSI eligibility purposes.
As of 2018, the SSA no longer requires a third-party SNT to include a spendthrift provision. A spendthrift provision prohibits involuntary and voluntary transfers of the beneficiary’s interest in the trust income or principal and thus requires creditors to wait until the trust money is distributed to the beneficiary before attempting to claim it to satisfy debts. Nevertheless, the authors often encourage the inclusion of a spendthrift provision in a third-party SNT to enhance the asset and creditor protection it provides.
A third-party SNT can serve various purposes when these requirements are satisfied. It can accommodate multiple beneficiaries, such as families with more than one child with a disability. In addition, it can be structured to provide gifts or donations to family members or third parties, thereby offering flexible support for the person with a disability.
Revocable or Irrevocable SNT
A third-party SNT can be revocable by anyone other than the beneficiary with a disability. Creating a revocable living third-party SNT is common to allow modifications in response to . . .
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