What Is a Special Needs Trust and How Does It Work?

A trust is a legal and financial arrangement that helps you protect assets and provide support for loved ones, heirs, or other beneficiaries.

One of the most unique types of trust is a special needs trust (SNT). This arrangement is for a beneficiary with mental or physical disabilities. In addition to providing financial support, special needs trusts, if administered correctly, allow the beneficiary to remain eligible for Medicare, Medicaid, Social Security, and other assistance.

According to the CDC, 389,960 adults in Idaho have a disability. This is equivalent to 28% or 1 in 4 adults in Idaho. Disability types include mobility, cognition, independent living, hearing, vision, and self-care.

As of 2022, “about 11% of Medicare beneficiaries in Idaho are eligible due to disability rather than age, versus about 12% nationwide.” Medicaid covers 2 in 7 people with disabilities in Idaho. Both health insurance programs cover people with disabilities, regardless of age—eligibility depends on income.

Special Needs Trusts have specific requirements, so you want to be certain the trust is administered correctly. Mistakes could cause the beneficiary to miss out on disability benefits.

State requirements for an SNT can be found here. If these criteria are not met, or the trustee does not make payments, the trust may be discontinued. Additionally, “if the Idaho Department of Health and Welfare or an Idaho county or city has a claim against trust property,” the Department, county, or city “may petition the court for an order terminating the trust.”

Keep reading to learn how to establish and manage a special needs trust.

Types of Special Needs Trusts (SNTs)

The Special Needs Alliance defines a special needs trust as a trust that provides support for people with mental or physical disabilities and chronic illnesses. The goal of an SNT is to supplement federal and state disability benefits rather than replace them. Therefore, the trustee needs to take specific steps to ensure that the beneficiary remains eligible for government support.

There are two varieties of special needs trusts, each of which serves a different purpose.

First-Party Special Needs Trust (SNT)

According to the Special Needs Alliance, a first-party SNT, also referred to as a self-settled trust, is funded with assets or income belonging to the individual with the disability. In other words, they are both the grantor and the beneficiary. The money could come from an inheritance, personal wealth, or a personal injury or insurance settlement.

First-party SNTs need to follow specific terms:

• The beneficiary must be the sole recipient of support from the trust. You cannot use the funds to support other family members or relatives.
• The beneficiary must be under 65 years old when creating the trust. 
• The trust must be irrevocable, meaning it cannot be changed once established.
• The remaining funds must go to Medicaid repayment when the trust ends, or the beneficiary dies.

It's necessary to follow these terms to avoid losing eligibility for government benefits.

Third-Party Special Needs Trust (SNT)

The Special Needs Alliance says a third-party SNT is funded by the income or assets of someone other than the beneficiary. The grantors are usually the beneficiary's parents, grandparents, siblings, or guardians. However, you are not required to be a blood relation or legal guardian to set up such a trust.

The rules for third-party SNTs are different than first-party ones:

• A third-party trust cannot be funded by assets belonging to the beneficiary. You cannot use the beneficiary's inheritance, gifts, or proceeds from a life insurance policy.
• The third-party SNT can be revocable or irrevocable, meaning you choose whether to create a changeable trust.
• There is no Medicaid payback provision in a third-party SNT. The trustor decides how the assets and estate get distributed after the termination of the trust or the beneficiary's death.

How Does a Special Needs Trust (SNT) Work?

There are three parties involved in a special needs trust. The funds and assets pass from the grantor to the beneficiary through an intermediary known as the trustee.

The trustee is responsible for controlling the trust, managing assets, and ensuring disbursement to the beneficiary. They typically need to follow the rules and disbursement schedule set by the grantor. In some instances, the trustee may have some say in distributing funds for extra expenses, such as additional medical care.

The assets in an SNT do not count as income, so they are not factored into public assistance eligibility. However, you cannot use the trust for expenses already covered by Medicare, Social Security, or other programs. For example, if a program pays for assisted living services, you cannot use the trust for these expenses. You can, however, use the trust for additional services, such as transportation, personal care, therapy, or other permitted expenses.

How Does a First-Party Special Needs Trust (SNT) Work?

The Special Needs Alliance explains that a first-party SNT has funds from the beneficiary. It is possible to set up such a fund yourself if you can do so. However, an individual with a mental disability that makes such a step impossible can rely on a relative, guardian, or court to establish the fund on their behalf.

The funds are then managed and disbursed by a trustee according to the guidelines of the trust. The disbursements are usually incremental and cover expenses that do not interfere with public assistance programs.

One unique caveat of first-person SNTs is that the remaining funds are repaid to Medicaid when the trust terminates or the beneficiary dies.

How Does a Third-Party Special Needs Trust (SNT) Work?

Third-party SNTs are for individuals planning long-term care for loved ones with disabilities. The third-party grantor does not necessarily have to be a family member or legal guardian. Friends or others can set up a trust, provided they follow all the regulations. 

Except for the third-party grantors, the basic process is the same for this type of SNT as for first-party trusts. A trustee disburses funds as required.

Any remaining funds after the trust's termination or the beneficiary's death can go to other beneficiaries. However, if the SNT includes any of the beneficiary's own assets, they may be subject to Medicaid repayment rules. This only applies to money contributed by the beneficiary, not any third parties.

Special Needs Trust (SNT) Rules

An SNT is legally binding and viable if it adheres to specific rules that differentiate it from the other types of trusts. 

• SNTs help manage resources for people with special needs or disabilities. You cannot establish this type of trust for someone without special needs.
• Only third-party SNTs can contain funds from other donors.
• For a first-party SNT, the beneficiary must be an individual with special needs below the age of 65 years. The trust must contain their own assets, though it can be established by a relative or judge.
• The beneficiaries cannot directly access the funds or assets in the trust. They can only receive the money through the trustee.

Anyone trying to establish an SNT should follow these rules to ensure full eligibility for government programs and any other benefits related to trusts.

How To Establish a Special Needs Trust (SNT)

Because of the requirements, establishing an SNT can be a daunting process. You can make things easier by working with a professional estate and trust planner. They can guide you through the steps and help you decide how much money your loved one needs to get the necessary support and services and have a good quality of life.

You also need to establish a disbursement schedule, plan for unforeseen expenses, figure out how to fund the trust and choose a trustee to manage the funds and disbursement. A skilled estate planner and trust administrator can help with the details so that you can follow regulations and plan adequate funding for the SNT.

Special Needs Trust (SNT) Benefits

An SNT can provide advantages to the beneficiary, but it can also help the trust's creator.  Here are the benefits that you can expect with a special needs trust.

Benefits of a Special Needs Trust (SNT) For Its Creator

A trust's creator can enjoy benefits related to flexibility, planning, and control over assets.

• An SNT ensures assets are used as intended. The legal agreement attached to a trust requires that the funds are only used for their intended purpose. The creator of an SNT can rest assured that the assets will directly support the beneficiary and provide for any services, treatments, or support that they need.
• An SNT allows for active investment. Trust funds can be invested by the trustee or an appointed financial advisor. These activities can help increase the trust's value.
• An SNT gives the grantor control over an inheritance. The creator of a third-party SNT can decide who inherits the trust or how the proceeds of the trust are distributed when the beneficiary dies.
• An SNT has multiple funding options. The creators of a third-party SNT can fund the trust as they see fit. They can use cash, securities, properties, or other available resources.

A financial expert with trust administration experience can help you set everything up to take full advantage of these benefits.

Benefits of a Special Needs Trust (SNT) For Its Beneficiary

The beneficiary gets financial support from an SNT, but there are other benefits that they enjoy, as well.

• An SNT preserves eligibility for public assistance. The beneficiary of an SNT will receive financial support from the trust while still qualifying for income-based government programs like Medicaid and SSI.
• SNTs are irrevocable. A first-party SNT is irrevocable, so the assets cannot be accessed by creditors or taken away as a result of a lawsuit. 
• An SNT protects against financial abuse. The SNT requires that trustees meet their legal duty to act in the beneficiary's best interest. It is illegal to misappropriate trust funds.
• SNTs can help maximize a personal injury settlement. You can set up a self-settled SNT to provide regular payments from an injury settlement. This can provide consistent income if you are unable to work.

Once the trust is set up, the beneficiary does not need to actively manage it, so they can simply receive the benefits they need without worrying about investments or other issues.

Learn more about our Trust and Estate Services

If you’re looking for a trustee, we can help. Idaho Trust offers decades of experience acting as a trustee, executor, and conservator. We specialize in a variety of trust services, and our partnerships with attorneys and CPAs help you set up and execute a special needs trust as well as the rest of your estate plan. Contact us with questions.