Introduction:

Special needs trusts are truly special. In general, trusts are governed by state law. Special Needs Trusts are governed by federal and state provisions. These trusts are heavily regulated and reviewed. Therefore, only a qualified attorney should be used to create a special needs trust.

Special needs trusts permit a disabled or elderly to qualify for public benefits. These trusts are sometimes referred to as special or supplemental needs trusts. The term “special” or “supplemental” is interchangeable. The primary distinction of such trusts is whether the special needs trust is first party or third party.

First Party SNT

The first party special needs trust may also be referred to as â€œOBRA 1993 pay-back trustâ€ or â€œtrust established in accordance with 42 USC 1396â€. These trusts are heavily scrutinized by local board of Social Services and by the Social Security Administration. The purpose of this trust is to hold assets of the disabled individual. The state who supported the disabled during his/her life, will need to be reimbursed from the assets of this Trust. Proper provisions for repayment must appear in this trust. This includes proper repayment priority.

Third Party SNT

A third-party SNT is intended to hold assets of another party for the benefit of the disabled individual. Such trust is not subject to review by the state or Social Security Administration. Therefore, such trust does not contain payback provisions and is not governed by 42 USC 1396. However, the trust must comply with relevant POMS provisions to ensure that both the principal and distributions do not negatively impact the beneficiary. See https://secure.ssa.gov/apps10/ for additional details. It is therefore a bad idea to combine assets of the beneficiary and third-party in the same trust.

Drafting Tip

Both the first party and the third-party SNT may be found to be non-compliant with special needs provisions. If this occurs, the assets held in such trusts would be considered resources to the disabled individual. This will likely cause that individual to lose access to certain benefits and become subject to over-payment and garnishment notices.

Due to this ongoing risk of review, every SNT must include a provision authorizing a trust amendment. Such amendment period is limited to 90 days. If an amendment is enacted within this window, resources held in such a trust are not subject to any period where they would seem as â€œavailableâ€ to the beneficiary. The 90 day period may be extendable for good cause, such as when a court needs to get involved to amend or review the trust.