All special needs trusts aim to allow individuals with special needs to save money for future needs while still maintaining their eligibility for government benefits like SSI and Medicaid. However, significant differences exist between pooled special needs trusts and individual special needs trusts that families should be aware of as they choose the right type of trust for them.
Pooled Special Needs Trusts
Pooled special needs trusts (SNTs) come in two forms: first-party self-settled SNTs and third-party SNTs. Pooled first-party self-settled SNTS are established by charitable associations that are typically nonprofit organizations under Section 501(c)(3) of the Internal Revenue Code. The nonprofit organization invests in and manages the assets of all individuals who contribute to the SNT. Each person has a separate bank account within the pool, but the nonprofit consolidates or “pools” the management and investment of all accounts.
The person with special needs, parent, grandparent, guardian, or the court must establish a bank account to hold the assets within the pooled SNT. States vary as to what happens to the account balance upon the beneficiary’s death or the person with special needs. In Illinois, the balance of the account must go to repay Medicaid.
Due to the Medicaid repayment requirement, some nonprofits have special rules for third-party contributions to the pooled SNT. For example, the third-party contributions may go into a separate account from any contributions made by the person with special needs. This arrangement is referred to as a third-party pooled SNT. Since the third-party contributions are kept separate from the beneficiary’s contributions, they need not be repaid to Medicaid upon the beneficiary’s death.
One benefit of the pooled SNT is that it typically accepts any account balance and does not require account minimums. This feature allows anyone, no matter how few assets they have, to open a special needs trust.
Another benefit is that they often have existed for quite some time and are economically stable. They also may have lower trust administration costs than an individual SNT.
Individual Special Needs Trusts
As with pooled SNTs, an individual SNT can be a first-party self-settled SNT or a third-party SNT. A first-party self-settled SNT consists of assets owned by the person with special needs. For instance, it may contain the proceeds of a personal injury or medical malpractice lawsuit. Any remaining balance in a first-party self-settled SNT upon the death of the beneficiary or the person with special needs must go to repay Medicaid.
In contrast, a third-party SNT contains assets contributed by the parents, grandparents, or other relatives of the individual with special needs. Any balance in a third-party SNT upon the beneficiary’s death is not required to repay Medicaid. Instead, the remaining balance can be donated to charity or used for any other purpose specified by the settlor or the person who created the third-party SNT.
SNTs can be funded in various ways. For example, relatives of the person with special needs can and should set up their estate plans so that any inheritance they leave to the person goes directly to the SNT rather than to the person. Doing this avoids making the person with special needs ineligible for government benefits but still permits them to receive and benefit from the inherited funds. The same is the case for gifts. If a grandparent wishes to give a significant monetary gift to a child with special needs, the gift should go to the child’s SNT rather than directly to the child.
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