Special Needs Trusts for Individuals with Disabilities

Special needs trusts are a helpful planning tool if a client has a disability or has family members or friends who are disabled. These kinds of trusts are designed to preserve a disabled person’s eligibility for government benefits. Monthly income and the value of resources in the person’s possession are evaluated to determine eligibility for certain government benefits. If disabled individuals receive public benefits, then it is possible that small inheritances or gifts may imperil their eligibility for public assistance. The goal of these trusts is to provide individuals with disabilities an option for supplementing their daily living expenses when the government benefits received are insufficient and to allow family and friends of individuals with disabilities to retain assets for accommodation of the individual’s comfort and well-being.

Special needs trusts are discretionary, spendthrift trusts. This means that the trustees of these trusts have complete control over distributions made to the beneficiaries to prevent depletion of trust funds, which could be caused either by overspending on the beneficiary’s behalf or beneficiary’s creditors reaching the trust monies. The trustee has the additional responsibility of ensuring that the amount of funds distributed to the disabled beneficiary does not render him or her ineligible for government benefits.

Both Colorado and Wyoming allow for special needs trusts. There are three types of special needs trusts: private, pooled, and third party. Each type offers different benefits and has separate requirements for establishment, but every type of special needs trust exists to preserve a person’s eligibility for government benefits.

Private special needs trusts are individual trusts drafted by an attorney. Beneficiaries under the age of 65 are eligible to have this kind of special needs trust. Originally, only a parent, grandparent, guardian, or a court could establish such a trust for an individual. On December 20, 2016, President Obama signed into law the Special Needs Trusts Fairness Act as part of the 21st Century Cures Act, which allows individuals who are mentally capable to establish their own special needs trusts for their own benefit. Section 5007 of the Act, titled “Fairness in Medicaid Supplemental Needs Trusts” contains the language allowing this new change. Although federal law now allows individuals with disabilities to establish these trusts for themselves, the private special needs trusts statutes in Colorado and Wyoming do not contain language reflecting the new law. See Wyoming Statute: W.S. § 42-2-403(f)(i)& (ii) and Colorado Statute: C.R.S. § 15-14-412.8.

Pooled special needs trusts are group trusts managed by a non-profit association. This type of special needs trust is helpful when difficulty exists with selecting a trustee or when there isn’t enough money to justify creating a private special needs trust. The costs of joining a pooled trust are generally lower than establishing a private special needs trust. As with private special needs trusts, individuals with disabilities can only join pooled special needs trusts if they are under the age of 65. Individuals with disabilities are also allowed to join a pooled trust themselves. Each pooled special needs trust has its own set of options, contracts, and fee schedules, so it is important to examine the terms of these documents before joining. Click here for a directory of pooled special needs trusts in Colorado and Wyoming.

Third party special needs trusts are unique because they are funded with assets that never belonged to the trust beneficiary. Money is provided to the trust for the benefit of the disabled individual via gift or inheritance. These trusts are usually created as part of the donor’s estate plan with arrangements for the person with special needs to receive gifts while the donor is still living and to manage an inheritance for the person when the donor dies.

When selecting which type of special needs trust to utilize, it is important to consider what happens to the funds when the trust terminates.

• Private: The trust agreement must grant Medicaid a first right of recovery against the trust assets upon the beneficiary’s death.
• Pooled: Medicaid payback may be avoided by permitting the trust to keep the assets upon the death of the beneficiary.
• Third Party: Because the funds in the trust never belonged to the beneficiary, the government is not entitled to reimbursement for Medicaid payments made on behalf of the beneficiary upon her death, and the grantor can determine how the remaining trust assets are to be disbursed at the death of the beneficiary.

Special needs trusts are a good option when a client wants to leave money or property to a loved one with a disability, but each type of special needs trust needs to be carefully considered to choose the one that best fits the needs of the disabled individual.