Trust, the SPECIAL NEEDS TRUST. A Special Needs Trust (SNT) also known as a
Supplemental Needs Trust, is an estate planning tool that allows Grantors (those
opening the Trust) for minors or disabled persons (Trustor) to maintain his or her
eligibility for public assistance benefits, despite having assets that would otherwise
make the person ineligible for those benefits.
There are two types of SNTs: First Party and Third Party funded (DHCS, 2021). First Party
funded means that the Trust is started and initially funded by monies already owned the
beneficiary, Third Party funded are when the initial contributions for the creation of the
Trust comes from any one other than the beneficiary themselves (SNA, 2023). This trust
is a QUALIFIED DISABILITY TRUST, whose form falls under the irrevocable “family trust”
line and is “complex” in its formation for income tax purposes (Anderson et al., 2023).
The trust itself is responsible for reporting its own items of income, deduction, and
credit. And as we’ve already learned a trust that does not require distribution of all its
income by the terms of the trust agreement is called a “Complex” Trust.
A “Qualified Disability Trust” or “QDT” is allowed the same exemption as an individual
under IRS Code §642(b)(2)(C). There are many advantages to having a SNT, it eliminates
many problems one has when caring long-term for disabled loved ones. One major
problem that it solves is that relieves one from the overwhelming pressure
parents/grandparents face when they are thinking of how their special needs loved ones
will carry on in life once they are no longer there to oversee and provide for them.
By starting a SNT, assets left to the disabled descendant will be managed by a Grantor
chosen Trustee, can be invested to earn additional income to continue to grow and
provide beyond the initial inheritance, and still allow the Trustor to benefit from mean
based social programs that can help bridge their financial gap due to their greater (and
growing) medical needs. In many of these cases the Grantors (parents/grandparents) are
the only consistent helpers and guardians in the Trustors (child/inheritors) lives, so
trusting strangers with the task to take care of them as well as they would themselves is
always a concern.
But with a SNT, a trusted Trustee is set over the funds they want to leave to their loved
ones and in many cases the Trustee is usually another abled bodied inheritor and
relative of the Trustee. A Special Needs Trust is also very flexible and advantageous in
the areas and items that it covers for the Trustee. Continuing Education, Vacations,
vehicles, and all things medical are just a few things approved for use under a SNT.
Unfortunately, all Trusts have their downsides. One major disadvantage (pitfall) that
confuses many Trustees, causing them to unknowingly commit serious troubles to the
life of the Trust (entity) and Trustor is found in the handling of both new contributions
and methods of distributions.
A SNT is allowed to earn income but in most states the income is capped at both a time
and amount earnings base, meaning there is a limit to income earned by the Trust both
monthly and in totality. In the Commonwealth of Virginia, the limit is based on both the
income and the medical expenses. In VA a SNT has a monthly income cap amount of
$800. Whereas the total Trust limit is $500,000.00 (except for in the Trust initial year)
(The Arc, 2022).
The Trustee must be careful about not disqualifying the beneficiary for public benefits
by giving them too much money, by making too much money, or by giving money
directly to the beneficiary. Good training and instructions must be given to the Trustee
to be able to follow/determine the fiscal, medical and personal needs (not wants) of the
Trustor are, and often that's not done in trusts like these (Singer & Stern, 2023).
Because of the nature in relationship between the Trustee and Trustor (the reluctance
to say no to unauthorized illegal Trust distributions to loved one), the lack of
Administrative Trustee training (unknown repetitive accounting/tax errors), and misused
of both new contributions and distributions (acts of embezzlement due to familiarity to
Trustors mental and physical limitations) (SNA, 2023).
References:
Anderson, K.E., Pope, T.R. & Rupert, T.J. (2023) Taxation 2023 Corporations,
Partnerships,
Estates & Trusts Pearson. (Chptr 14 – Income Taxation Of Trust and Estates)
Filing A Tax Return for a Special Needs Trust (March 2021) SNA – Special Needs Alliance
– THE VOICE Vol. 15, Issue 4 Retrieved May 11, 2023.
https://www.specialneedsalliance.org/the-voice/filing-a-tax-return-for-a-special-
needs-trustwhat-a-trustee-needs-to-know-at-tax-time
IRS Code §642(b)(2)(C)
Singer, S., & Stern, P.S. (2023) Special Needs Trusts – SNT – Supplemental Needs Trusts.
The American College of Trust and Estate Counsel. ACTEC. Retrieved May 11, 2023.
https://www.actec.org/estate-planning/special-needs-trusts-snt/
Special Needs Trust (2021) Department of Health Care Services – DHCS CA.gov Retrieved
May 11, 2023. https://www.dhcs.ca.gov/services/Pages/Special-Needs-
Trust.aspx#:~:text=A%20Special%20Needs%20Trust%20(SNT,Party%20and%20Thir
d%20Party%20funded.
The Arc – Comparing Special Needs Trusts and the VA-ABLE (September 21, 2022)
https://thearcofnova.org/wp-content/uploads/sites/6/2021/01/SNT-vs-VA-ABLE-
09.21.22.pdf
