People with disabilities or chronic illnesses require more specialty care than other individuals. Unfortunately, these expenses add up quickly and can drain finances.
One way to reduce financial strain is to open a Special Needs Trust. The beneficiary, who is a disabled individual, can use the money in the trust to spend on care and services.
Purposes of an SNT
According to the NYC Human Resources Administration, a Special Needs Trust has two main purposes. One is to pay for things that government-sponsored programs, such as Medicaid, do not cover. The other is to shelter money and assets so the beneficiary is still eligible for these programs.
Types of Special Needs Trusts
The Corporate Finance Institute discusses the various types of these trusts:
- Self-settled SNT: Also called a first-party SNT, the funds in this trust come from the beneficiary. This is more common if the beneficiary receives money from a lawsuit or an inheritance, and the amount would mean the individual is no longer eligible for assistance.
- Third-party SNT: For this trust, someone who is not the beneficiary, such as a parent, guardian or grandparent, creates and funds it. The funding may come from a decedent’s estate or from someone living who wants to contribute one large sum or smaller amounts at regular intervals.
- Pooled SNT: The funding of a pooled trust comes from multiple beneficiaries who pool their money. The management of this trust is by a non-profit trustee.
There is taxation of a Special Needs Trust. Any distributions from the trust do not count as earnings, but there is an owing of taxes on any remaining amount.