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Understanding the mechanics of a special needs trust

| Jun 22, 2021 | Estate Planning |

Caring for a disabled person can be a difficult estate planning issue. Both the federal and Tennessee governments provide significant financial aid or individuals who meet the Social Security Administrations definition of “disability,” but most, if not all, of these programs place limits on the income and net assets of the beneficiary in determining eligibility. In order to solve this dilemma, both state and federal governments have created an entity known generally as a “special needs trust” (SNT). Creating a special needs trust can provide financial assistance for disabled persons without making them ineligible for government assistance.

The basics of an SNT

An SNT can be created using assets of the disabled person or the assets of a family member or third person. Persons who may create an SNT are the disabled person, a parent, a grandparent, a legal guarding or the court. The assets used to fund the trust may be contributed by person on this list except the court. The person establishing the SNT must appoint a trustee to manage the assets and ensure that these funds are used only to make proper expenditures.

The document establishing the trust must state that the trust assets can be used only to provide food, shelter, clothing and healthcare for the beneficiary. Also, the trust must be irrevocable. Upon the death of the beneficiary, any assets remaining in the trust must be paid to the State of Tennessee to reimburse it for any payments made by the state for medical assistance provided to the beneficiary.

Once an SNT is established, assets in the trust or income earned by these assets are not counted in determining whether an individual is financially eligible for programs such as Social Security Disability Insurance

Different kinds of SNTs

An SNT funded with assets belonging to the beneficiary is known as a first party trust. An SNT funded with assets belonging to persons other than the beneficiary is known as a third-party trust.

A third type of SNT is called a “pooled trust.” This type of SNT is funded with assets intended to meet the approved needs of several beneficiaries. The trustee manages all of these assets on behalf of the members of the pooled trust. The trustee must maintain a separate account on behalf of each beneficiary to insure that each member of the pooled trust receives the intended benefits.

Setting up an SNT

Anyone interested in establishing an SNT should speak with an experienced estate planning attorney. A knowledgeable attorney can explain the mechanics of SNTs in detail and determine whether an SNT is an appropriate estate planning tool. A capable estate planning attorney will also be needed to draft the necessary trust documents.