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Supplemental Needs Trusts: Providing for Beneficiaries with Disabilities
By Lauren Surdyke on November 3, 2022 at 10:00 AM

Sometimes leaving an inheritance to a loved one who has a disability can do more harm than good. Many public benefits programs have asset limitations for beneficiaries to qualify to receive assistance. If a well-intentioned relative leaves funds to a beneficiary who has a disability without having the proper safeguards in place, the beneficiary may be required to pay penalties or become ineligible to receive public benefits. There are options available to provide for such beneficiaries without compromising their eligibility for public benefits.

What is a Supplemental Needs Trust?

A supplemental needs trust (“SNT”), also known as a “special needs trust,” is an estate planning vehicle to provide for beneficiaries with disabilities. The SNT can provide for things that public benefits do not cover, such as non-covered medications and therapies, vacations, entertainment, clothing, care managers, and other items to supplement the beneficiary’s lifestyle; however, there are strict requirements for a trust to qualify as an SNT.

When to Create an SNT

A settlor can create an irrevocable trust for the beneficiary as a standalone document. The settlor and others can make gifts over time to the SNT. Another option is for a grantor to incorporate an SNT into their revocable trust that will become effective upon the grantor’s death. These SNTs are also known as “third party supplemental needs trusts.”

If an individual with a disability is under age 65, then that individual (or the beneficiary’s legal guardian) can create and fund an SNT in certain circumstances. This is known as a “first party supplemental needs trust.” First party SNTs are required to include a “payback provision” upon the beneficiary’s death to reimburse public benefits programs for funds expended during the beneficiary’s lifetime.

Common Pitfalls

The rules governing SNTs frequently change. It is important to consider this when creating an SNT and regularly review the document to ensure that it complies with current law. If the SNT is in a revocable trust, then the grantor can amend the trust. The grantor of an irrevocable SNT might include a trust protector or provide the trustee with a limited power to amend the trust to ensure compliance with current law.

Another common pitfall is failing to provide adequate flexibility to trustees in making distributions for beneficiaries who have disabilities. There are some situations where it may make sense for a trustee to make a distribution that would disqualify a beneficiary from receiving public benefits.  For example, the trustee may wish to make such a disqualifying distribution if the beneficiary does not medically qualify to participate in a public benefit program or wishes to pursue alternative treatment.

For more information about planning with a Supplemental Needs Trust, please contact one of the attorneys in our Trusts & Estates Practice Group.

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