Supplemental Needs Trust, When to Fund and Possible Taxes Consequences

Many parents with children with special needs consider adding a Supplemental Needs Trust (“SNT”) to their Estate Plan. Using a SNT to receive assets and money from a parent’s estate is how many parents try to avoid disqualifying their child from receiving government benefits. For Supplemental Security Income (“SSI”) eligibility, applicants must be a U.S. citizen or national (or one of the limited categories of aliens), and over 65 years old, blind, or disabled, with limited income and resources.

To keep the child’s income and resources low in non-existent for benefits qualification, selection of the appropriate Trust is crucial. There are three types of special needs trusts to options to evaluate.

Master Pooled – The Arc of Texas can offers their services for a Master Pooled Trust (click here for more info).

Another type of SNT is a 1st Party or Self-Settled SNT. This is typically used when a disabled individual receives a personal injury settlement or child support. The funds of the 1st Party SNT after termination are subject to a claim of reimbursement by Medicaid Estate Recovery Program (government payback).

The most commonly obtained SNT is a 3rd Party Supplemental Needs Trust. When setting up Estate Plans, parents of children with special needs can, in their Last Will and Testament, can provide for long-term care of their child by leaving inheritance to the Trustee of the 3rd Party SNT. The parents are both the settlors/grantors, and initial trustees.

Some individuals wish to avoid probate, but are unsure of how to fund their child’s SNT. Many parents turn to life insurance for financing the years of care their child will require after both parents have passed.

As a rule, you should coordinate between the attorney drafting the SNT, the agent writing up the life insurance policy, and your accountant or financial advisor who should determine whether the estate plan is advisable for tax purposes.

For most people, the SNT remains unfunded during the lives of the parents/settlors, and as the trustees, the parents have no responsibilities or owe any duties to the Trust.

QUESTION: Do you want to prohibit the SNT from owning life insurance on the life of the parents/settlor?

Yes. The SNT agreement should be written so that the Trust will not be allowed to own a life insurance on the life of the Settlor.

Question: If the 3rd Party SNT is funded, is it a Qualified Disability Trust?

To meet the criteria to be considered a Qualified Disability Trust (“QDisT”), the SNT must be irrevocable, for the sole benefit of the individual with a disability under the age of 65, whose disability is as defined for purposes of SSI and/or SSDI programs. Have your accountant look at the deemed exemption of $4,150. This exemption amount is allowed in full and is not subject to phaseout in 2025 under the Tax Cuts and Jobs Act of 2017.

Question: What is a grantor trust and what are the tax benefits?

A Grantor Trust, as defined by the Social Security Administration, is a !st Party or Self-Settled trust where the Grantor/Settlor is also the sole beneficiary of the trust.