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What is a Special Needs Trust?

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By Nate Schnackenberg

A Special Needs Trust (SNT) is a financial product. A specialized trust fund. Think of it as a magic basket for your valuables. This basket has special properties that allow the beneficiary – the person for whom this basket was created – to remain eligible for government benefits (like SSI and Medicaid) even though he/she may have loads and loads of valuables inside the basket. A Special Needs Trust is designed to help people living with disabilities keep their long-term public benefits even though they may have lots of money held in trust. The beauty of the magic basket is, assets held in it don’t count against the means testing conducted in order to ascertain benefits eligibility.

It’s called a Special Needs Trust because once the basket has money in it, that money is used for special needs, not regular needs. Regular needs are presumably paid for by the public benefits which the beneficiary enjoys. Special needs are the things that enhance life… things like specialized medical equipment or specialized furniture, or technological equipment. SNT money can be used for things like trips, vacations, outings, transportation and other recreational activities. It may be used for specialized therapies not covered by public benefits. We’ve even used SNT money to buy season tickets to the local stadium or auditorium. Most SNT’s can even buy, sell, and own property!

There are two types of Special Needs Trusts. In our industry, they are called “1st Party” and “3rd Party” SNT’s.

1st Party Special Needs Trusts are simply a magic basket designed to hold the beneficiary’s money. In a 1st Party scenario, once the beneficiary dies, the government will make a claim on whatever is left in the magic basket. In this way, the government has the right to pay itself back for the benefits enjoyed by the beneficiary in his/her life.

3rd Party Special Needs Trusts are a magic basket designed to hold money that never belonged to the beneficiary. In a 3rd Party scenario, once the beneficiary dies, the government has no claim on what remains in the basket. If assets remain, they are distributed according to the wishes of whoever funded the trust initially.  

Both 1st and 3rd party SNT’s are administered in largely the same way. The Trustee (the person responsible for administering the SNT) will know what types of distributions are allowed, not allowed, or discretionary. Discretionary distributions are just that – up to the discretion of the trustee. As an example, pretend John doe asks to buy a car. John Doe has $700,000 in trust and enjoys lots of investment and other income. The trustee decides to allow the purchase. Meanwhile, Missy Joe asks to buy a car. Missy only has $125,000 held in trust, and her medical needs are going through the roof. The trustee views the vehicle request as a ‘want’, and in light of more important ‘needs’ decides to disallow the purchase. In this way, two identical requests are made, but each approval must be based on the trustee’s discretion, and no two trusts are ever identical.

At Good Shepherd Fund we administer Special Needs Trusts, Charitable Remainder Trusts, Annuities, Foundation Disbursements, and all sorts of things. Please don’t hesitate to contact us. We’d be delighted to speak to you about your long-term planning, and explore the virtues of the Special Needs Trust relative to your individual circumstance.