A special needs trust (SNT) is a planning tool that allows you to set aside resources for an individual with special needs without jeopardizing their eligibility for vital means-tested government assistance programs like Supplemental Security Income (SSI) or Medicaid. The money in an SNT can be used to enrich the beneficiary's life, paying for luxuries and extras that public benefits don't provide. The goal of a special needs trust is to ensure that the beneficiary has everything they need to live a comfortable, dignified, and enjoyable life.
SNTs are typically terminated after the beneficiary's death, with the trustee dissolving the trust according to instructions detailed in the trust document. This may require the trustee to perform a wide range of tasks, such as filing the trust's final tax return, paying income taxes, and handling other expenses like funeral and burial costs.
Sometimes, when the beneficiary of a special needs trust dies, excess funds remain. What happens to those funds depends on the type of trust and how it was funded. Here's what you need to know.
First-Party Special Needs Trusts
When a person with special needs relies on government programs, receiving a court settlement or inheriting money or property in their own name can put their benefits at risk. Forming a first-party special needs trust and funding it with these assets can provide an effective solution for this dilemma.
However, this type of SNT has specific requirements for formation and termination. First-party special needs trusts must be established for the benefit of a person with special needs who is under age 65 and must be created by the court or the beneficiary's parent, legal guardian, or grandparent.
When the beneficiary dies, any remaining money in the trust must be used to reimburse the state—often dollar-for-dollar—for the cost of care and services that Medicaid or other public programs provided for the disabled person during their life. The trustee must pay back these government-funded liens before distributing any remaining assets to other beneficiaries (known as residual beneficiaries) named in the trust. If satisfying these liens exhausts the leftover funds, no assets will pass to residual beneficiaries.
Third-Party Special Needs Trusts
Third-party SNTs, the most common type of special needs trust, are created and funded by someone other than the trust beneficiary—usually a parent, another relative, or caretaker. Because the third-party SNT and not the special needs beneficiary owns the assets, the trustee isn't required to pay the government back for Medicaid or other services when terminating the trust after the beneficiary's death. Instead, they can distribute any excess trust funds to residual beneficiaries, who are often named in the trust document at the time of creation.
Pooled Special Needs Trusts
These special needs trusts are created and managed by non-profit organizations that pool funds from multiple SNT accounts and invest the money for the benefit of all beneficiaries. When the beneficiary of a pooled SNT dies, any funds that remain in their individual account go to the umbrella trust to cover trust administration costs.
Our Attorneys Can Help You With Special Needs Trusts
Special needs planning can be complicated. When mistakes could interrupt government benefits and the continuity of care for an individual with special needs, there's far too much at stake to go it alone. At Cucinelli Geiger, PC, our special needs planning attorneys can help you identify the best type of SNT for your disabled loved one and create a trust with clear instructions for what should happen to the remaining assets when the beneficiary passes away. We can also help you plan for and handle any tax obligations associated with the termination of the special needs trust.
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