Q1.My friend, Ken, is physically disabled, but has full mental capacity. His parents and grandparents are no longer around. He would like to initiate a Special Needs Trust for himself, since he wants to ensure that he is protected against the risk of impoverishment, but he can't. I heard about The Special Needs Trust Fairness Act, designed to help people like him. Can you tell me more about the Act and the status of it?

Q2. Also, on another note, we have an adult son with Down's Syndrome and are considering a special needs trust for him. What is the difference between a “first party” and a “third party” special needs trust? Thanks for your help!

A1. The Special Needs Trust Fairness Act (S. 1672) is a bipartisan bill that would allow mentally competent people with special needs to create their own special needs trusts. It was recently added to a Senate bill, and is therefore one step closer to becoming a law. However, it is unclear whether there are enough supporters to get the job done. 

Currently, a disabled person — even one with full mental capacity — cannot create a special needs trust without a parent, grandparent, or legal guardian. Therefore, countless people with special needs who don't have parents or grandparents or a guardian, or whose parents or grandparents are unwilling or unable to help them, are forced to petition the courts to establish trusts even though they are perfectly capable of initiating the process themselves.

If enacted, The Special Needs Trust Fairness Act will allow individuals with disabilities, when appropriate, to create special needs trusts that can be used to supplement daily living expenses and care when government benefits alone are insufficient. It will empower them to be responsible for their own life decisions and have access to what is rightly theirs.

The Act, which is supported by the National Academy of Elder Law Attorneys (NAELA) and the Academy of Special Needs Planners (ASNP), would amend Section 1917(d)(4)(A) of the Social Security Act (42 U.S.C. 1396p(d)(4)(A)). We at The Farr Law Firm also support the Special Needs Trust Fairness Act. The current law when it comes to special needs individuals with full mental capacity initiating their own trusts is unfair and causes unnecessary work for the court system. We urge you and others who care about the disabled in our country to support the bill and to make your support known to your senators and representatives in Congress.

A2. Per your second question about "first party" and "third party" Special Needs Trusts, both types of trusts are created for the benefit of an individual with a disability, but have some differences. Below is a brief summary about them:

First Party Special Needs Trusts

• A First Party Special Needs Trust is funded with assets or income that belong to an individual with a disability (the beneficiary).
• The trust must be irrevocable and must provide that Medicaid will be reimbursed upon the beneficiary's death or upon trust termination, whichever occurs first. Because of this, First Party Special Needs Trusts are often called “Payback Trusts.”
• The trust must be established by a parent, grandparent, legal guardian or the court.
• A First Party SNT is commonly funded with an inheritance, personal injury lawsuit, or child support.

Third Party Special Needs Trusts

A Third Party Special Needs Trust is funded with assets belonging to a person other than the beneficiary.

• Funding typically comes from the estates of parents or grandparents and life insurance policies naming the third party SNT as beneficiary.
• Practically anyone other than the beneficiary can create a Third Party SNT.
• Assets remaining in a properly established Third Party SNT are not recoverable by Medicaid at the time of the beneficiary’s death – in other words, there is no payback requirement. This allows the trust creator to provide for alternate beneficiaries upon the death of the disabled beneficiary.

When it comes to special needs planning, The Law Firm of Evan H. Farr, P.C. can guide you through this process. Please call us at 703-691-1888 in Fairfax, 540-479-1435 in Fredericksburg, 301-519-8041 in Rockville, MD, or 202-587-2797 in Washington, DC to make an appointment for a no-cost consultation.

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Critter Corner: Pooled Special Needs Trusts

Dear Commander Bun Bun,

I am considering a pooled special needs trust (managed by a non-profit organization) for my daughter, Shannon, who is intellectually disabled. What are some of the benefits and limitations?

Thanks,

Sheena Eads-Attrust

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Dear Sheena,

Pooled Third Party Trusts are an alternative to setting up your own Special Needs Trust if you can’t come up with a good choice for trustee or if you are only putting a modest amount of assets into the trust.

They can be advantageous because the people managing the trust and its assets are typically attuned to the special needs community and knowledgeable about agency rules regarding SSI and Medicaid programs. In addition, even if you don’t have a lot of money to leave to your loved one, a Third Party Pooled Trust provides a way to benefit from a Special Needs Trust without having to create one yourself.

Pooled trusts are not for every family. Why?

• Some non-profits end up doing a bad job managing pooled trusts or may even go out of business altogether.
• Some pooled trusts distribute assets only at certain times of the month. This can be a problem for a beneficiary who may need distributions more frequently.
• Generally, there is a one-time setup fee that can run from a few hundred dollars to several thousand dollars. Plus, there is typically an annual fee that is based on a percentage of the assets that are put into the trust that can be several thousand dollars a year.
• Once the assets are in the pooled trust, it is difficult to move the assets to another trust.
• Some pooled trusts will not agree to own real estate or authorize other nontraditional investments.

Before you sign on with a pooled trust, it is wise to explore your options. Read more on our website. Please call us at 703-691-1888 in Fairfax, 540-479-1435 in Fredericksburg, 301-519-8041 in Rockville, MD, or 202-587-2797 in Washington, DC to make an appointment for an initial no-cost consultation

Hop this was helpful!

Commander Bun Bun