October is Down syndrome awareness month. Down syndrome is a genetic condition in which a person has an extra chromosome. This results in developmental delays and lifelong intellectual disability. About 1 in 700 babies born each year in the United States are affected. Their reduced mental capacity puts them at a higher risk of making costly mistakes or being defrauded. That’s where special needs trusts come in. But what is a special needs trust? Let’s zoom out for a second.
What is a trust?
A trust is a fiduciary relationship that allows for the secure holding of assets intended for another party. These assets can include cash held in bank accounts, investments like stocks and mutual funds, life insurance payouts, and physical property such as vehicles, collectibles, or real estate. The trust sets guidelines for how these assets are to be managed.
Who is involved in a trust?
There are three key roles in a trust. Each can be occupied by multiple people, and in many circumstances, one person may hold multiple roles.
The grantor, also known as a trustor, or settlor, is the person who donates the assets.
The trustee is a person or group tasked with managing the assets until their disbursement. Generally, anyone can be a trustee, including the grantor or the beneficiary. However, it is forbidden for a sole beneficiary to be a sole trustee.
The beneficiary is the person on whose behalf the trust is created, and who will receive the assets. A contingent beneficiary can also be named to receive some or all of the assets in the event of some contingency. The most common contingency is the death of the benefactor; in this case, a remainder beneficiary can be named to receive the rest of the funds. For example, if the grantor’s child is the beneficiary, the death of the child can result in the funds going to the grantor’s grandchildren.
What is a special needs trust?
Those with Down syndrome and other disabilities require special financial protections, and special needs trusts are a great way to facilitate this. Special needs trusts, also known as supplemental needs trusts, allow disabled beneficiaries to receive the assets from the trust without losing eligibility for government programs like Supplemental Security Income (SSI) or Medicaid. If set up correctly, a special needs trust will cover expenses like medical care, dietary needs and supplements, and entertainment.
Types of special needs trusts
There are a few types of special needs trusts. Your trustee should be able to explain in detail the differences between each and help you decide which one is right for you.
First-party special needs trust
First-party special needs trusts are funded primarily with assets belonging to the beneficiary. It can be established on the beneficiary’s behalf by a parent or grandparent, legal guardian, or a court, but most of the time they are established by the disabled individual.
This first-hand involvement by the beneficiary is good for situations when the disability is strictly physical rather than mental. For example, first-party SNTs are commonly used to hold cash from settlements in civil cases, such as might occur after an injury, and employed to pay for medical expenses. However, this makes a first-party special needs trust a bad candidate for those with Down syndrome.
There are other drawbacks and limitations with a first-party special needs trust. Because the assets already belong to the disabled individual, the assets are not protected from creditors. A first-party SNT must be irrevocable, meaning that it cannot be changed without the beneficiary’s permission, and the grantor cannot also be the trustee. After the beneficiary’s death, all remaining assets are subject to reimbursement for assistance paid by Medicaid before any additional beneficiaries can receive funds.
Third-party special needs trust
Third-party special needs trusts are the most common type of trust used for special needs beneficiaries.
They are commonly called family trusts because they are usually established by the beneficiary’s parent or grandparent. However, they can be created by anyone except the beneficiary. A third-party special needs trust is funded with assets belonging to the grantor, and not the beneficiary’s own assets. Anyone can contribute.
Unlike first-party special needs trust, creditors cannot touch assets in some third-party SNTs. Third-party special needs trusts also do not have Medicaid payback provisions.
Pooled special needs trust
A pooled special needs trust is a less common type of special needs trust. They are used in situations where there are multiple beneficiaries. They can be either first-party or third-party, or a blend of the two. However, they do not allow for contingent beneficiaries to be designated.
These trusts are typically used in situations where there are multiple beneficiaries. The assets are “pooled” together for efficiency, though each individual’s assets are still tracked separately. Due to the complexity of dealing with assets for multiple people, they are best run by nonprofit organizations rather than by individuals.
Setting up a family trust
When the beneficiary’s disability is mental and hinders their ability to manage valuable assets, a third-party or family trust can be a powerful protector of their financial security.
Family trusts are living trusts, which means they are funded, and the funds can be disbursed, while the grantor is still alive. This is important because disabled beneficiaries can’t wait for an inheritance – they have expenses to pay in the immediate term.
You must decide whether to make your family trust revocable or irrevocable, a choice you don’t have with a first-party SNT. A revocable trust can be changed during the beneficiary’s lifetime, though it automatically becomes irrevocable once funded. There are pros and cons to both types. Revocable trusts are more likely to keep you out of probate court, but are vulnerable to creditors.
You should have a specific plan for how the trust will aid the beneficiary and how it will be funded.
Choose a trustee may be the most important part of creating any trust, as the trustee shoulders the responsibility of executing the trust to the grantor’s full wishes. They are responsible for managing the assets, paying taxes, and supervising their distribution. They should have experience in finance and an understanding of the market, because they will usually be making decisions regarding how to invest the assets in the trust. The trustee must be honest and ethical and understand that they are acting on someone else’s behalf, not to enrich themselves. Choosing an individual trustee can be a good way to maintain a personal touch, but many grantors prefer the institutional support of an organization. If you choose an individual, you should also designate a successor trustee to take over in case the trustee dies or becomes incapacitated.
The next step is to create the trust document, which will formally establish the trust upon its signing. A trust document will outline what assets will be held in the trust, how they are to be managed, and who will receive them. Your trust document is a legally binding contract, and must be approved by regulatory agencies. In Oklahoma, the trust document must also be notarized. Once you know what the trust will do, how it will be funded, and who will run it, you’re ready to take the final step and fund the trust by transferring the assets to the trustee.
Special considerations for special needs trusts
Special needs trusts must be approved by both the Department of Human Services (DHS) and the Social Security Administration (SSA). The individual must meet the legal definition of “disabled” and be under 65 at the time the trust is established.
Disabilities are linked to a decrease in employment opportunities; only about 57% of those with down syndrome are employed. It is crucial that a special needs trust will be adequately funded upon the grantor’s death.
A special needs trust must be drawn carefully so that the assets are not counted toward the beneficiary’s own assets, which could jeopardize their access to public benefits that they may rely on. In terms of hiring a trustee, it is discouraged to choose the beneficiary in a special needs situation because the beneficiary may not have the mental capacity to make sound financial decisions. It must also be considered that the beneficiary’s disability may progress or worsen over time.
Trust Company of Oklahoma’s services
If you have a child with Down syndrome, you may be worried about what will happen to them after they’re gone. This Down syndrome awareness month, you can let those fears go by building a plan to protect their future. Contact us to get started on establishing a special needs trust for your child, and rest assured that they won’t have to be alone.