If you practice in estate planning or elder law, you likely have heard of special needs planning. You know you should plan for a beneficiary who has special needs by creating a special needs trust (SNT) to hold their inheritance. But what about including contingent SNT provisions in the client’s revocable living trust? Let’s talk about what exactly this type of planning is and why it is important.
The legal authority to create a Qualified Disability Trust (QDisT) falls under §642(b)(2)(C) of the Internal Revenue Code. To qualify as a QDisT, the trust must meet the following criteria:
- A QDisT must be irrevocable.
- All beneficiaries must be disabled and receive Supplemental Security Income or Social Security Disability Income benefits. There can be more than one beneficiary, but all beneficiaries must be disabled. (According to IRC 642(b)(2)(C)(ii), a trust can still qualify as a QDisT if the corpus of the trust transfers to someone who is not disabled after all disabled beneficiaries are deceased.)
- A QDisT cannot be a grantor trust; the trust must be the taxpaying entity.
- The trust must be established for the benefit of disabled individuals 65 years of age or younger. (The QDisT does not cease to be a QDisT after the beneficiary turns 65, but it must be established beforehand.)
A Self-Settled Special Needs Trust (SNT) and a Third-Party Supplemental Needs Trust (SNT) are used when a beneficiary would like access to extra funds without jeopardizing their eligibility for public benefits. Let’s review some key differences between these trusts.
The Self-Settled SNT—available in Elder Docx™—is irrevocable and is used when the assets funding the trust belong to the beneficiary. This would be if an individual has money in the bank, or comes into money, such as via a settlement or inheritance. If the funds are obtained through a settlement, an MSA subtrust may be needed. (More on that in a bit.)