SPECIAL NEEDS TRUST MISTAKES: Pt. 2 – Third Party Trust Mistakes

A Third Party Special Needs Trust is created for the benefit of a disabled person, which ensures that the disabled person will have proper care. The Third Party SNT is funded with assets typically by family and friends of the disabled person. Unlike the First Party SNT, the property is never owned by the disabled person, and there is also no payback of Medicaid or any other government benefits. When properly planned, a Third Party SNT can provide greater flexibility than a First Party SNT, and can be a very useful mechanism for providing proper care for a person with special needs.

While every state has its own requirements for Special Needs Trusts, generally, Third Party SNTs are more flexible because there are no age requirements. They also do not have to be monitored by the Probate Court in the county of their residence, and may be either revocable or irrevocable. As long as there is careful planning and proper management, there is no repayment of any governmental funds, like Medicaid.

There are common mistakes that must be avoided to ensure that the Third Party SNT works properly and will not have adverse effects on the disabled person or trustee. One of the first mistakes is improperly transferring property into the trust that may disqualify government benefits or require the trust to payback the state funds. It is essential that the property in the trust is never owned by the disabled person, and he or she have no legal right to the property. Transferring property, including money, that can be traced back to the disabled person can be considered a “step-transfer,” and would result in Medicaid and other state funds to be repaid, which could cost thousands of dollars.

Another common mistake is making the primary caregiver the trustee. The trustee position for any SNT is a demanding job, and mistakes must be avoided. Caregivers already have plenty of responsibility looking after the person with special needs. Adding to the stressful job of being primary caregiver to the trustee of the SNT, may result in careless mistakes with the transfer of money to the disabled person. For example, a disabled person on SSI cannot receive money for rent, food, and clothing. Thus, the trustee must keep accurate records to document the purpose for each distribution to the disabled person, and avoid having to repay the government for an improper SSI distribution. Also, by having the trustee and caregiver roles assumed by different people, an important check and balance is put on the primary caregiver and trustee.

A third common mistake is having a disabled person as a beneficiary of a Crummey Trust. In a Crummey Trust, the beneficiary has Crummey Powers, which allow for a Grantor to gift property under the annual gift tax exclusion, and the beneficiary is given the right to withdraw the gift for 30 days. However, the beneficiary of a Third Party SNT should not be given such right since a disabled beneficiary of a Third Party SNT would possibly be required to repay the government benefits received by them, to the extent of the withdrawal power.

Third Party SNTs are very useful vehicles to help fund the care that a disabled person desperately needs. They are a flexible and efficient way to help the disabled person financially and keep their government benefits if drafted and managed properly. If you have a member of your family who has special needs, and want the ability to provide them with financial assistance without adversely affecting their governmental benefits, please contact Bill Hesch, attorney, CPA, and financial planner to get started, or for a second opinion.

Bill Hesch is a CPA, PFS (Personal Financial Specialist), and attorney licensed in Ohio and Kentucky who helps clients with their financial and estate planning.  He also practices elder law, corporate law, Medicaid planning, tax law, and probate in the Greater Cincinnati and Northern Kentucky areas.  His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

(Legal Disclaimer:  Bill Hesch submits this blog to provide general information about the firm and its services.  Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel.  While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog.  Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)