There are two different types of special needs trusts (SNTs). The first is a "self-settled" trust. A self-settled trust is typically one that an individual creates and funds with his or her own resources. In the case of a self-settled special needs trust, the disabled individual, if they are a minor or incapacitated adult, cannot create it himself. Federal law requires that it be created by a parent, grandparent, or guardian and be approved and supervised by the South Carolina probate court. If they are a competent adult, the “21st Century Cures Act” (P.L. 114-255), Section 5007 of which is titled “Fairness in Medicaid Supplemental Needs Trusts” now allows them to establish a SNT without court supervision.
The disabled individual's own resources, however, are transferred to the trust. This is commonly referred to as funding the trust. This type has one major disadvantage over a third-party special needs trust (often called a supplemental needs trust) in that a payback provision must be included in the document. What this means is that any state that has rendered Medicaid assistance will be paid back to the extent of such assistance out of the remaining funds. This occurs, however, only upon the death of the disabled individual. Third-party trusts are not required to have such a payback provision and any remaining money can be left to the individual's heirs or even revert back to the party that funded the trust. This type must be established and funded before the disabled individual attains the age of 65.
"Pooled" trusts are also self-settled special needs trusts. These trusts are typically used when the disabled individual is over the age of 65 or is under 65 and does not have a living parent or grandparent to create the trust. Of course, even if there is no living parent or grandparent, the court or the individual's guardian may create a trust for individuals under the age of 65.
Pooled trusts are managed by a non-profit organization. In the case of the pooled trust, the trustee opens a sub-account for each disabled individual and the assets are pooled for investment purposes. Because pooled trusts are self-settled trusts, the disabled individual's assets are subject to the payback provisions referred to above.
Third party trusts are created by a third party other than the disabled individual (like a parent or grandparent) and are funded with assets of the third party. The disabled individual's own assets cannot transferred to a third-party special needs trust. These trusts may be inter vivos or testamentary meaning that they can be effective during the third party's lifetime or after his or her death. Unlike self-settled SNTs, third-party SNTs have the advantage of not requiring a payback provision to any state which has rendered medical assistance upon the disabled individual's death. Thus, other family members may inherit trust assets remaining after the disabled individual's death.
Planning for both the resources of the disabled individual and to ensure that he or she can maintain or become eligible for SSI or Medicaid requires care. Further, estate planning for clients who have disabled children or other disabled family members who they want to benefit either during their lives or after death, requires competent legal counsel. The interplay of both federal and state law makes this area of practice even more challenging.
The trustee of a SNT has a unique set of responsibilities. The trustee must be keenly aware of the unique issues pertaining to distributions of trust principal and income when disabled individuals are beneficiaries. Keeping government benefits intact and preserving limited resources for such individuals are both paramount in clients' minds. Non-professional trustees will need competent counsel as to distribution planning for the disabled beneficiary as well as other trust administration issues.
In the case of a disabled child, a life care plan may be prepared to better assess the needs of that child. This is particularly so in the case if the child receives a personal injury settlement. A life care plan can be of utmost importance to the trustee who is working to invest assets to ensure that they will outlast the child and to maintain a quality of life for that child that adequately meets his or her medical and personal needs.
Lastly, trust investments are an important part of the planning. If parents have a disabled child but have limited financial resources, they may want to consider funding such a trust with life insurance to ensure that there are sufficient resources to adequately meet the child's needs. With regard to other trust assets, trustees have to be sufficiently prepared to invest assets to meet Federal and South Carolina state law requirements that pertain to trust investments as well as the needs of the disabled beneficiary.
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The 2015 National Defense Authorization Act gave military members and retirees the option to direct payment of a Survivor Benefit Plan for a dependent child to a Special Needs Trust (SNT). A SNT is a legal instrument specifically designed for the benefit of a person with a disability and usually preserves the beneficiary’s eligibility for other federal or state benefits.
To be eligible to elect the option to
cover the SNT under SBP, the member or retiree must have previously
elected Spouse and Child or Child Only coverage for a disabled child
under the SBP. There must also be an established and certified SNT. Contact a South Carolina Probate Attorney to assist you with the drafting of the SNT to be sure that it meets all of the state and Federal requirements.
Who May Make the Election and Effective Dates
If the member is alive and if they have previously elected Spouse and Child or Child Only coverage under the SBP, they may make the designation to direct payment on the behalf of a beneficiary to a SNT at any time.
After the death of a member or retiree, if the member or retiree had elected Spouse and Child or Child Only coverage under the SBP, any surviving parent, grandparent or court appointed legal guardian may make the designation on the behalf of a beneficiary.