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When and how to use a special needs trust

On Behalf of | Oct 12, 2020 | estate planning

One of the most talked-about estate planning techniques of the last 10-15 years has been the special needs trust. Special needs trusts (SNT) in Illinois are used to shield assets from taxes and the spend-down provisions in laws such as Medicaid and Medicare. The shielded assets must then be used exclusively to pay for medical care and living expenses of the beneficiary. Many families who have a member who is a special needs patient are not aware of the existence of SNTs or of the different kinds of SNTs that can be used to best suit the family’s financial situation.

Three kinds of SNTs

The laws of Illinois and the United States basically permit the formation of three types of SNTs that can be used to shield the beneficiary’s assets from the financial need calculation used to determine Medicaid eligibility.

The first party SNT may be the most popular. These SNTs are used for the deposit and holding of assets belonging to the special needs person. Once deposited in the trust, the assets can only be used for the benefit of the designated beneficiary as supplements to benefits provided by government benefit programs such as Medicaid and Supplemental Security Income. The beneficiary of a first party SNT must disabled and younger than 65. The trust must be created by a parent or grandparent or legal guardian. The trust must contain a provision directing the refund of unused assets to the state (or states) that paid Medicaid benefits to the beneficiary.

A third party SNT is very much like a first party SNT, but the funds must come from a third party, not the beneficiary. Typical grantors for third party SNTs are parents, grandparents, other relatives with financial means. The unused assets in the SNT are exempt from the Medicaid payback requirements.

Illinois law permits the formation of a third type of SNT, known as the pooled special needs trust. In such a trust, the assets of all members are commingled with separate accounts kept for each beneficiary. The pooling of assets gives trustees more investment power than they would have only managing the assets of a single beneficiary.

Setting up a special needs trust

Anyone who is interested in establishing a special needs trust should contact an experienced estate planning attorney for advice on whether an SNT would suit the needs of the special needs patient and the family.