The terms “special” and “supplemental” are often used interchangeably. Frequently, “special” refers to a first party, or self-settled trust, while “supplemental” refers to a trust settled by a third party which supplements basic food and shelter. Other sources define “special” as one in which the trustee has limited discretion to make distributions, whereas “supplemental” is one in which the trustee has unlimited discretion. For simplicity and clarity, I will often just refer to both types of trusts as SNTs, while specifying whether the trust is funded by a third party or self-settled.
There are two main types of SNTs. The biggest difference between the two types of trusts is the identity of the person whose assets are used to fund the trust. Both types of SNT can and should be individually designed to meet the specific needs of the disabled person.
The first type of SNT, the self-settled SNT, is funded with the assets of the person with the disability. Frequently, this type of SNT is created when the disabled person themselves receives a sum of money, often as a result of a lawsuit. Sometimes a self-settled SNT needs to be created because the disabled person received an inheritance, but their families had not planned with a qualified estate lawyer to avoid that pitfall. It is important to plan now so that your assets flow directly into a third-party SNT in order that any funds remaining upon the death of the disabled person do not have to be paid back to Medicaid.
The main drawback to self-settled SNTs is that after the disabled person dies, Medicaid or the Office of Mental Health is entitled to receive all remaining assets in the trust. For those disabled persons who have received a large sum of money as the result of a lawsuit, the ability to fund an SNT, enabling them to use that money for their supplemental needs as opposed to having the entire sum be used towards shelter and housing, is a wonderful option. However, before the disabled person receives any gift, inheritance or life insurance policy, the grantor of the assets should consult with an attorney who focuses on special needs planning.
The second type of SNT, the third-party SNT, is usually funded with the assets of a parent, grandparent or guardian, and can be funded either during the parents’ or grandparents lifetimes, or upon their deaths. The trustee is designated the beneficiary of life insurance policies, annuities, bank and/or brokerage accounts.
As we shall discuss in further blog posts, when created properly, a trustee can be instructed as to how you would like your loved ones’ needs supplemented with the assets from the third-party SNT.