Key Takeaways
- First-party (d)(4)(A) trusts funded with beneficiary's assets require Medicaid payback
- Third-party trusts funded by others have no payback requirement
- Pooled trusts (d)(4)(C) managed by nonprofits available for those over 65
- SNTs can pay for quality-of-life expenses but should avoid direct cash to beneficiary
Special Needs Trusts (SNTs)
Special needs trusts--also called supplemental needs trusts--are the cornerstone of disability planning. These trusts hold assets for beneficiaries with disabilities without disqualifying them from means-tested government benefits. Understanding the three primary types of SNTs and their distinct rules is essential for CFP candidates.
First-Party Special Needs Trust (d)(4)(A) Trust
A first-party SNT, also called a "self-settled" or "(d)(4)(A)" trust (referencing 42 U.S.C. Section 1396p(d)(4)(A)), is funded with assets that belong to the beneficiary with disabilities.
Common Funding Sources
- Personal injury lawsuit settlements
- Inheritance received directly (before proper planning)
- Divorce settlements or property divisions
- Accumulated work earnings
- Back payments of Social Security benefits
Key Requirements
| Requirement | Detail |
|---|---|
| Beneficiary age | Must be under age 65 when the trust is established and funded |
| Irrevocability | Must be irrevocable once funded |
| Sole benefit | Must be for the "sole benefit" of the beneficiary with disabilities |
| Medicaid payback | Upon beneficiary's death, state Medicaid must be reimbursed for benefits paid |
| Establishment | Can be established by parent, grandparent, legal guardian, or court |
| 2016 Amendment | Beneficiary can now establish their own first-party SNT if mentally competent (previously required parent, grandparent, guardian, or court) |
Medicaid Payback Provision
The defining characteristic of first-party SNTs is the Medicaid payback requirement. When the beneficiary dies:
- The state(s) that provided Medicaid benefits must be notified
- The trust must reimburse Medicaid for all medical assistance paid on behalf of the beneficiary
- Only remaining funds (if any) pass to remainder beneficiaries named in the trust
Example: A beneficiary receives a $500,000 personal injury settlement placed in a first-party SNT. Over 30 years, the trust grows and is spent down, with $150,000 remaining at death. If the state Medicaid program paid $200,000 in benefits during the beneficiary's lifetime, the entire $150,000 goes to the state, and nothing passes to family.
Court Involvement
First-party SNTs often require court approval when:
- Funds come from a lawsuit settlement (especially for minors)
- The beneficiary lacks mental capacity to approve the trust
- State law requires court oversight of trust establishment
Third-Party Special Needs Trust
A third-party SNT is funded with assets belonging to someone other than the beneficiary--typically parents, grandparents, or other family members.
Key Features
| Feature | Third-Party SNT |
|---|---|
| Funding source | Assets of parents, grandparents, other relatives, or anyone except the beneficiary |
| Payback requirement | None--remaining funds pass to remainder beneficiaries chosen by the grantor |
| Age restrictions | None--can be established at any age |
| Revocability | Can be revocable (during grantor's lifetime) or irrevocable |
| Flexibility | More flexible distribution standards; can include sprinkle provisions for other beneficiaries |
Advantages Over First-Party SNT
- No Medicaid payback: Family wealth stays in the family
- No age restriction: Can benefit individuals who become disabled after age 65
- Greater flexibility: Can be part of a revocable living trust, testamentary trust, or standalone document
- Multiple beneficiaries: Can serve as "pot trust" for several family members with disabilities
Integration with Estate Plans
Third-party SNTs are commonly established as:
- Standalone inter vivos trust: Created during grantor's lifetime, can receive lifetime gifts and life insurance proceeds
- Testamentary trust: Created within the grantor's will, funded at death
- Subtrust of revocable living trust: Part of comprehensive estate plan, avoids probate
Naming the SNT as Beneficiary
Life insurance, retirement accounts, and other beneficiary-designated assets can name the third-party SNT as beneficiary. This ensures funds bypass probate and flow directly into the protected trust structure.
Critical Warning: Never name the individual with disabilities as a direct beneficiary of life insurance or retirement accounts. Always name the SNT.
Pooled Trusts (d)(4)(C)
Pooled trusts, authorized under 42 U.S.C. Section 1396p(d)(4)(C), are managed by nonprofit organizations and serve multiple beneficiaries.
Structure
- A nonprofit organization establishes and manages a master trust
- Individual beneficiaries join through a "joinder agreement"
- Each beneficiary has a separate subaccount
- Assets are pooled for investment purposes
- Each subaccount tracks the beneficiary's share
Key Features
| Feature | Pooled Trust (d)(4)(C) |
|---|---|
| Management | Nonprofit organization serves as trustee |
| Age requirement | Available to individuals over age 65 (unlike first-party SNTs) |
| Funding | Can be funded with beneficiary's own assets (like first-party) |
| Payback provision | At death, funds may be retained by nonprofit for other disabled beneficiaries OR paid to state Medicaid |
| Expertise | Professional management with special needs experience |
| Costs | Often lower administrative costs due to economies of scale |
Advantages of Pooled Trusts
- Age flexibility: Only option for self-settled trusts when beneficiary is over 65
- Professional management: Nonprofit has expertise in SSI/Medicaid rules
- No individual trustee needed: Eliminates burden on family members
- Investment efficiency: Pooled assets achieve better diversification
- Organizational continuity: Nonprofit outlives individual trustees
State Variations
Some states (notably California and New York) do not exempt pooled trust assets for Medicaid eligibility when the beneficiary is over 65. CFP professionals must verify state-specific rules.
SNT Comparison Table
| Feature | First-Party (d)(4)(A) | Third-Party | Pooled (d)(4)(C) |
|---|---|---|---|
| Funding source | Beneficiary's own assets | Others' assets | Beneficiary's own assets |
| Age to establish | Under 65 | Any age | Any age (including over 65) |
| Medicaid payback | Yes (to state) | No | To nonprofit or state |
| Who can establish | Parent, grandparent, guardian, court, or competent beneficiary | Anyone except beneficiary | Nonprofit organization |
| Revocable option | No | Yes (grantor's choice) | No |
| Trustee | Named individual or corporate | Named individual or corporate | Nonprofit organization |
| Best for | Lawsuit settlements, direct inheritances | Family estate planning | Older beneficiaries, those needing professional management |
What SNTs CAN and CANNOT Pay For
Appropriate SNT Expenditures (No Benefit Reduction)
Trustees should use SNT funds for expenses that supplement government benefits and enhance quality of life:
- Personal care: Clothing, grooming products, haircuts
- Education: Tuition, books, tutoring, vocational training
- Recreation: Vacations, entertainment, hobbies, sports equipment
- Transportation: Vehicle purchase/maintenance, ride services, travel
- Technology: Computers, tablets, smartphones, adaptive equipment
- Medical: Therapies, treatments, and equipment not covered by Medicaid
- Furniture and household items: Not shelter, but contents of the home
- Legal and financial services: Attorneys, accountants, financial planners
- Companion care: Paying for a caregiver or companion to travel with beneficiary
2024 Update: As of October 2024, the Social Security Administration removed food from the in-kind support and maintenance (ISM) category. SNTs can now pay for food without reducing SSI benefits.
Expenditures That May Reduce SSI (In-Kind Support and Maintenance)
Payments for shelter expenses are still considered ISM and may reduce SSI benefits by up to 1/3 of the federal benefit rate plus $20:
- Rent or mortgage payments
- Property taxes
- Homeowner's/renter's insurance
- Utilities (gas, electric, water, sewer, garbage)
Important: If the beneficiary receives only SSDI (not SSI), ISM rules do not apply, and the SNT can pay for any expenses including shelter.
What SNTs Should NEVER Do
- Give cash directly to beneficiary: Cash is countable as income/resource
- Pay for items the beneficiary then sells: Converts to cash
- Provide refundable gift cards: Treated as cash equivalent
- Duplicate Medicaid-covered services: Wasteful and unnecessary
- Make loans to beneficiary: Creates countable asset
Trustee Considerations
Selecting the right trustee is critical for SNT success:
Individual Trustees (Family Members)
Pros: Know the beneficiary, motivated by love, no management fees Cons: May lack expertise, potential for burnout, family conflicts, finite lifespan
Corporate Trustees (Banks, Trust Companies)
Pros: Professional management, continuity, expertise in investment and tax Cons: Higher fees, may lack personal touch, minimum balance requirements
Best Practice: Co-Trustees
Many SNTs name both:
- Individual co-trustee: Family member who knows the beneficiary and makes distribution decisions
- Corporate co-trustee: Handles investments, accounting, tax filings, and compliance
This combination provides both personal attention and professional expertise.
Maria, age 68, receives a $200,000 inheritance from her deceased mother. Maria receives SSI and Medicaid for her lifelong disability. Which planning vehicle can accept these funds while preserving her benefits?
John's parents establish a third-party special needs trust funded with $500,000 in life insurance proceeds. John, who has Down syndrome, receives SSI and Medicaid. When John dies at age 55 with $150,000 remaining in the trust, what happens to these funds?