Special needs trusts are designed to provide funds to improve the quality of life for a disabled person while still protecting his or her eligibility for public benefits such as MassHealth and Supplemental Security Income (SSI). Funds in a special needs trust can be used for a wide range of goods and services not covered by public benefits, including entertainment, transportation, electronics, adaptive equipment, therapy, and much more. Importantly, special needs trusts help ensure that the disabled person will continue to receive proper care and have access to funds for supplemental needs after his or her parents can no longer provide care themselves.
In Massachusetts we have four main types of special needs trusts: first-party, third-party, first-party pooled, and third-party pooled. Let’s begin by looking at the differences between first- and third-party special needs trusts, then we’ll explore pooled trusts.
First-party special needs trusts are funded with assets belonging to the disabled person (the trust beneficiary). For example, if the disabled person received compensation in a lawsuit, these funds could be used to fund the trust.
Third-party special needs trusts hold assets that were never owned by the disabled person. They are typically funded with assets inherited from a parent or grandparent.
Ownership of the funded assets in a special needs trust has important ramifications when it comes to estate planning. Funds remaining in a first-party special needs trust after the disabled person’s death must be used to reimburse MassHealth for benefits provided to the disabled person during his or her lifetime. After this payback responsibility has been met, any remaining funds can be disbursed to remainder beneficiaries named in the trust, such as surviving siblings and charities. In the case of third-party special needs trusts, no MassHealth payback is required (since the disabled person never owned the assets used to fund the trust). This means all funds remaining in the trust can be distributed to remainder beneficiaries.
Administering a special needs trust is time-consuming and complicated. Some families do not have anyone who can handle this important responsibility, or even if they do, do not want to burden them. I also often recommend against naming a sibling as trustee, as that can add tension into the sibling relationship. In these situations, I might recommend a professional trustee for one of the trusts above, or recommend pooled trusts.
Pooled Trusts
Pooled trusts are run by non-profits, such as the PLAN of Massachusetts and Rhode Island. These organizations can provide a range of services, including:
- Review and payment of trust disbursement requests
- Annual accounting
- Tax statement preparation
- Life care planning and access to Licensed Social Workers
- Professional fund investment
As I mentioned earlier, there are two types of pooled special needs trusts in Massachusetts, first-party and third-party. The rules governing MassHealth payback are the same for pooled and non-pooled special needs trusts: Upon the beneficiary’s death, remaining funds in first-party pooled trusts must be used to reimburse MassHealth whereas funds remaining in third-party pooled trusts do not. In addition, the organization that managed the first- or third-party pooled trust will retain a percentage of the deceased beneficiary’s account. Anything left will be disbursed to the remainder beneficiaries, typically siblings.
It is worth noting that a first-party special needs trust must be established and funded before the disabled person turns 65. There are no age restrictions regarding when a third-party special needs trust or either type of pooled special needs trust can be established and funded.
Until next time, take care…