Trusts are among the most versatile estate planning documents. Changing the ownership of certain assets (including real estate and cash) can be advantageous for many reasons. One type of trust commonly used by Virginians is a special needs trust (SNT).
The most common type of special needs trusts Virginians use is the third-party special needs trust. This type of SNT is created by a family member of the individual with special needs. Generally, a third-party SNT in Virginia may be testamentary (created by the third-party’s Last Will and Testament) or living (activated during the grantor’s lifetime). Grantors typically have the choice of making SNTs revocable or irrevocable, as well.
What is the Purpose of a Special Needs Trust?
Broadly speaking, many estate planners use trusts to:
- Avoid probate;
- Closely control the distribution of money and other assets to their beneficiaries; and
- Protect certain assets from creditors and estate taxes.
The main purpose of a special needs trust has to do with the last point. Individuals with special needs may be eligible for government programs such as Supplemental Security income (SSI) and Medicaid. Both of these programs are means-tested, however, which means that individuals with special needs are ineligible if they own assets over a certain monetary threshold. The current asset limit for SSI is $2,000, although it (and other limits) are subject to change.
A third-party SNT, unlike some other types of SNTs, allows descendants of the individual to receive whatever money and assets are left when the individual with special needs passes away. With, for example, a first-party SNT, the government will demand the leftover money and assets through a payback provision.
Best Practices For Using Third-Party SNTs
- The money and assets funded into a third-party SNT may be used for a wide range of purposes. However, it is important to remember that the contents of a third-party SNTs belong to the grantor and NOT the individual with special needs.
- The trustee has the responsibility of disbursing assets from the third-party SNT. The grantor may act as the trustee while he or she is still alive; upon the grantor’s death, the successor trustee will assume control.
- When money is disbursed from a third-party SNT, it should be disbursed for the benefit of the individual with special needs and not directly to the beneficiary. This might seem like a minor difference, but it is important in helping the beneficiary keep government assistance.
An Attorney’s Help Is Crucial
A properly crafted special needs trust will help ensure a loved one with special needs is eligible for essential government aid. The key phrase here is “properly crafted.” There are many nuances that need to be addressed before you make a special needs trust. Speaking with an experienced estate planning attorney is the best way to make sure your legal documents accomplish what you intend for them to accomplish. Norton Pelt would be glad to speak with you soon about your estate planning objectives. Call us at (540) 440-7007 to set up an initial consultation today.
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