The Legacy of a Special Needs Trust: The Distribution of Assets After a Beneficiary’s Death

October 28, 2020

Special Needs Trusts (SNTs) are created for the benefit of a disabled beneficiary to enable them to retain assets and receive much-needed public benefits. These assets supplement their public benefits by allowing the special needs individual to purchase items that are needed but not paid for by public benefits. There are two types of SNTs: a first-party SNT and a third-party SNT. It is important to understand the difference between the two types of SNTs because the termination of the trust when the disabled beneficiary dies is very different.

First-Party Special Needs Trust

A first-party SNT is funded with the disabled individual’s own assets. These SNTs are used when the individual with special needs receives a lump sum payment through an inheritance or settlement that would ordinarily disqualify them from receiving public benefits. The benefit received is the continuation of benefits, but upon the disabled individual’s death, these trusts have a payback provision to the state. This first-party SNT must reimburse the state for all Medicaid expenses incurred during the beneficiary’s life. This payback occurs upon the death of the special needs individual. A first-party SNT can name remainder beneficiaries, but these beneficiaries will only receive a distribution once Medicaid is reimbursed in full.

Third-Party Special Needs Trust

A third-party SNT is funded with assets from a third party and created by the third party for the special needs individual’s benefit. Usually, a parent or grandparent creates these SNTs. The benefit to a third-party SNT is there is no payback provision and the third party setting up the trust may name secondary beneficiaries. These secondary beneficiaries will receive the remainder interest of the trust upon the death of the disabled individual without any Medicaid payback or reimbursement.

SNTs are complex estate planning documents that require specific language to prevent the special needs individual from losing critical public benefits. Attorneys design SNTs to provide funding to a disabled individual for a lifetime. It is important to work with an attorney to create these plans and to ensure your plan has the flexibility necessary.

If you have questions or would like to discuss further, please reach out to Erika Apelis at efa@kjk.com or 216.716.5637, or contact any of our Wealth & Estate Planning attorneys.


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