Many Arizona families have a member who suffers from a severe disability or chronic illness; these individuals are generally referred to as special needs persons. Families with members who are classified as special needs individuals have a special challenge in planning for the future of these family members.
Many government programs at both the state and federal levels provide financial assistance for individuals who suffer from a disabling physical or mental condition, but many of these programs have an income eligibility threshold; that is, if the disabled individual has assets that are greater than the limits specified by the regulations that control the plan, they may be ineligible for benefits.
In recent years, the estate planning industry and federal and state agencies that regulate taxation have devised a tool that provides a substantial benefit for special needs individuals: the benefit is called a special needs trust.
The basics of special needs trust
A special needs trust (SNT) allows the person establishing the trust to donate assets to an SNT that can be disregarded in calculating the beneficiary’s net worth. For example, an individual who was disabled in an auto accident and who was awarded substantial damages can contribute some or all of these assets to an SNT, thereby becoming eligible for government benefits.
The SNT must be established by a trust document that contains necessary provisions to qualify the trust under state and federal law. For example, the funds in the trust can only be used to pay for health care, housing, food, and clothing for the beneficiary.
All SNTs are managed by a trustee, who must abide by the spending limitations in the trust document. Anyone can serve as a trustee, but many families decide to appoint an attorney or a professional trustee to manage the trust. The trustee must make regular reports to the probate court about the trust’s income and expenses.
Different kinds of SNTs
In Arizona, special needs trusts fall into three categories: first-party trust, third-party trust, and pooled trust. A first-party SNT is funded with the beneficiary’s own assets. Third-party SNTs are funded with assets provided by a person other than the beneficiary, such as a parent or other family member. A pooled SNT is a trust that combines the assets of two or more SNTs to obtain greater leverage in purchasing services and greater ability to leverage investment funds.
Valuable advice from an estate planning attorney
Anyone with a special needs member who is interested in establishing a special needs trust may wish to consult an experienced estate planning attorney.