What Is a Special Needs Trust?
A special needs trust is set up for a person with special needs to supplement any benefits the person with special needs may receive from government programs. A properly drafted special needs trust in Arkansas will allow the beneficiary to receive government benefits while still receiving funds from the trust. There are three main types of special needs trusts, but first, it is important to understand how a typical trust works.
What Exactly Is a Trust?
A trust is really a relationship between three parties — a donor, who supplies the funds for the trust; a trustee, who agrees to hold and administer the funds according to the donor’s wishes; and a beneficiary or beneficiaries who receive the benefit of the funds. Often, but not always, the donor’s wishes are spelled out in a document that gives the trustee instructions about how they should use the trust assets. Trusts have been used for estate planning for a long time and are highly useful tools for ensuring that a donor’s property is administered as they see fit. One of the reasons trusts are so popular is that they usually survive the death of the donor, providing a low-cost way to manage the donor’s assets for others when the donor is gone.
How Do Special Needs Trusts Differ?
A special needs trust is designed for a person with special needs to manage assets for their benefit while not compromising access to important government benefits. There are three main types of special needs trusts: the first-party trust, the third-party trust, and the pooled trust. All three name the person with special needs as the beneficiary. A first-party special needs trust holds assets that belong to the person with special needs, such as an inheritance or an accident settlement. A third-party special needs trust holds funds belonging to other people who want to help the person with special needs. A pooled trust holds funds from many different beneficiaries with special needs.
First-Party Special Needs Trusts
The reason there are several different types of trusts is due to Supplemental Security Income (SSI) regulations. SSI is a government program that assists people with low incomes who have special needs. To qualify for SSI, an applicant or beneficiary can have only $2,000 in their own name. If the person has more than $2,000 in their name (typically because of excess savings, an inheritance, or an accident settlement), the government allows them to qualify for SSI so long as they place assets into a first-party special needs trust. While the beneficiary is living, the funds in the trust are used for their benefit, and when they die, any assets remaining in the trust are used to reimburse the government for the cost of their medical care. These trusts are especially useful for beneficiaries who are receiving SSI and come into large amounts of money because the trust allows the beneficiary to retain their benefits while still being able to use their funds when necessary.
Third-Party Special Needs Trusts
The third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold any asset imaginable belonging to the family member or other individual, including a house, stocks and bonds, and other types of investments. The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect an SSI beneficiary’s access to benefits. The funds can be used to pay for the beneficiary’s supplemental needs beyond those covered by government benefits. But a third-party special needs trust doesn’t contain the “payback” provision found in first-party trusts. When the beneficiary with special needs dies, any funds remaining in their trust can pass to other family members or to charity without having to be used to reimburse the government.
Pooled Special Needs Trusts
A pooled trust is an alternative to the first-party special needs trust. Essentially, a charity sets up these trusts that allow beneficiaries to pool their resources for investment purposes while still maintaining separate accounts for each beneficiary’s needs. When the beneficiary dies, the funds remaining in their account reimburse the government for their care, but a portion also goes towards the non-profit organization responsible for managing the trust.
Other Uses of Special Needs Trusts
Anyone can establish a special needs trust in Arkansas, and if the trust is properly drafted to account for tax planning, in certain situations, gifts into the trust could very well reduce the size of the donor’s taxable estate. As if these are not enough reasons to create a trust, elderly people who are attempting to qualify for long-term care coverage through Medicaid can transfer their assets into a properly drafted third-party special needs trust for the sole benefit of a person with disabilities without incurring a transfer-of-assets penalty. This allows the elder to qualify for Medicaid and ensures the person with disabilities is taken care of in the future.
Of course, every person with special needs is different, which means that every special needs trust in Arkansas will also be different. The only way to determine which special needs trust is right for your family is to meet with our Arkansas special needs planning lawyers to discuss your needs.
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