Four Basic Ways to Fund a Trust
How to fund a Special Needs Trust? So you and your family are investigating establishing a Special Needs Trust (SNT) for a loved one, but are not sure where to start or what options may work for your family. You are not alone! Many families are faced with the same question of how to fund a Special Needs Trust for their loved one.
The information and scenarios on this page are an effort to provide you and your family resources and ideas, not guarantees or legal advice. ACT recommends discussing legal and financial matters with your attorney, financial or estate planner as appropriate.
There are four basic ways to build up a third or first –party special needs trust
One method is simply to utilize personal assets (first or third-party), perhaps from extended family as well as immediate family (third-party). Another possibility is to fund the trust with permanent life insurance. Proceeds from a settlement or lawsuit can also serve as the core of the trust assets. Lastly, an inheritance can provide the financial footing for this kind of trust.
Families choosing the personal asset route may put a few thousand dollars of cash or other assets into the trust to start, with the intention that the initial investment will be augmented by later contributions from grandparents, siblings, or other relatives. Those subsequent contributions can be willed to the trust, or the trust may be named as a beneficiary of a retirement or investment account.
When life insurance is used, the trustor makes the trust the beneficiary of a life insurance policy. When the trustor dies, the policy’s death benefit is left, tax free, to the trust.
A lump-sum settlement or inheritance can be invested while within the trust, inviting the possibility of growth and compounding. With a worthy trustee in place, there is less likelihood of mismanagement, and funds may come out of the trust to support the beneficiary in a measured way that does not risk threatening government benefits.
The trust may also be funded with tangible, non-cash assets. Examples include real estate, securities, collections of cars or art or antiques, even a business. These assets (and others like them) can be left to the trustee of the special needs trust via a revocable living trust or will. Just remember that the goal of the trust is to provide the trust beneficiary with cash. Those tangible assets will need to be sold or liquidated to meet that objective.
Before we review some general scenarios there are a few areas and issues you should become familiar with in effort to make knowledgeable decisions.
Issues you should examine when selecting a Special Needs Trust.
There are a variety of important issues an individual and family need to considering when establish a trust. Below are just a few items that you should be aware of and consider in your planning process. You may have specific issues that are not addressed here, we advise you to contact ACT or your attorney for clarification.
Will or a Trust?
One main difference between a will and a trust is that a will goes into effect only after you die, while a trust takes effect as soon as you create it. A will is a document that directs who will receive your property at your death and it appoints a legal representative to carry out your wishes. By contrast, a trust can be used to begin distributing property before death, at death, or afterwards.
Another difference between a will and a trust is that a will passes through probate. That means a court oversees the administration of the will and ensures the will is valid and the property gets distributed the way the deceased wanted. A trust passes outside of probate, so a court does not need to oversee the process, which can save time and money. Unlike a will, which becomes part of the public record, a trust can remain private.
There must be a valid will to properly designate how and to whom a person’s property is distributed upon their death. If you would like to create a trust that will come into effect only after your death, consider putting a testamentary trust into your will.
A testamentary trust is a type of express trust that is written in a will or in a document incorporated by reference into a will, which arises upon the death of the settlor. It specifies what assets or funds are to be distributed after the death of the settlor.
To create a testamentary trust in a will, the settlor must designate a trustee and specify the beneficiaries. As mentioned above, a testamentary trust comes into effect not until the settlor dies. Thus, the testamentary trust must be contained in the settlor’s last (final) will, so the trust can be created upon the settlor’s death.
Then, the probate process will take place. A testamentary trust is not automatically created upon the settlor’s death. While other types of trusts may avoid probate, a testamentary trust must go through the probate process. The testamentary trust will come into effect upon the completion of this process.
After the provisions are reviewed by all parties, a trust will proceed to generate distributions. A trustee, chosen by the settlor, will manage the property or funds in the trust until the trust terminates. The trustee may be required to go to the probate court at least once a year and ensure the court that the trust is being handled in accordance to the will and state law.
Public Benefits
One of the key elements to consider when investigating establishing a SNT is if the beneficiary is receiving public benefits. Understandably, when an individual is receiving Public Benefits, the family should seek to retain those benefits while protecting financial resources for the sole benefit of the beneficiary. If public benefits are being provided, the individual obtaining those benefits is generally allowed to receive and maintain under $2,000 of personal financial resources. If excess funds are collected/earned the individual will lose their public benefits, until their funds are reduced below the $2,000 threshold.
Because Social Security’s definition of disability includes an inability to work due to medical impairments, working while receiving disability can raise red flags with Social Security. below is a general overview of the work/income challenge faced by individuals with disabilities.
Individuals receiving SSDI are allowed one nine-month trial work period (TWP) to experiment with working while still drawing their full monthly benefits. In 2019, monthly earnings over $880 will trigger a trial work period month. The nine months occur over a 60-month period, but the months need not be consecutive. Once you’ve exhausted the nine months of your TWP, you will no longer receive disability benefits for any month you earn over the Substantial Gainful Activity threshold ($1,220 in 2019).
Recipients of SSI will lose benefits if their income or assets exceed the SSI eligibility thresholds. In 2019, the limit is $771 per month for countable income, while the limit for assets is $2,000. Not all income from work counts toward the income limit, however (review Understanding SSI below link). But some “in-kind” income, like free housing or food, does count against the limit, and keep in mind that some portion of spousal income and resources will be “deemed” to the SSI beneficiary. (Learn more about income limits and SSI.)
As stated, this is a primary driving force for the development of any Special Needs Trust. The rules, regulations and limitations for SSI can at times be confusing. ACT strongly encourages individuals and families to engage professionals when questions arise.
Pay Back Provision
If the beneficiary receives public benefits and establishes a first party SNT, there will be a payback provision for services received to the department of Human Services (DHS). First-party SNTs are most often used when the person with a disability inherits money or property outright, or receives a court settlement. These SNTs also are useful when a person without a prior disability owns assets in his or her name, later becomes disabled, and thereafter needs to qualify for public benefits that have an income or asset limitation. These SNTs are creatures of federal law, specifically (i) individual first-party SNTs are authorized under 42 U.S.C. § 1396p(d)(4)(A), and (ii) pooled first-party SNTs are authorized under 42 U.S.C. § 1396p(d)(4)(C). First-party SNTs also are commonly called self-settled SNTs, Medicaid payback trusts, OBRA ’93 trusts, and d4A or d4C trusts.
All first-party SNTs (Non-Pooled) must specify that after the beneficiary’s death, all amounts remaining in the SNT, up to an amount equal to the total lifetime medical assistance benefits paid on behalf of the beneficiary by the Medicaid program(s) of any state(s), are first repaid to those state Medicaid program(s), even to the extent of fully exhausting the remaining SNT assets. Only after this Medicaid payback may any balance be distributed to other remainder beneficiaries.
This is not necessarily the case in Third Party SNT’s, where the residual funds at the death of the beneficiary are protected from the payback provisions for public benefits and can be provided to alternative beneficiaries. Similarly, the First Party (Self Settled) Pooled SNT is protected from the pay back provision, however, the beneficiary is the charity providing the Pooled Trust. The pooled residual funds are used to assist other members of the Pooled SNT as stated in the Master Trust Agreement. (LINK SEE POOLED TRUST)
It’s important to consider all the factors in deciding what direction to take regarding establishing a SNT. ACT recommends that you consult with an attorney and/or your estate planner when making this important decision.
Need for a SNT Attorney
To establish a first or third party Special Needs Trust (SNT), a special needs trust attorney is required to create the trust. ACT works with several established and qualified attornies in our region. We are happy to assist you identify a professional to assist you through this important process. The attorney fees vary, but a good rule of thumb is between $3,000-5,000+-. To join a pooled trust there are no attorney fees, as you/beneficiary are joining an established trust as a participant in the pool. The Master Trust Agreement is the Trust document for all Pooled SNTs. Some individuals and families utilize an attorney even in setting up a pooled trust even though it is not required.
When setting up a Will, an attorney can be a useful resource and is strongly recommended. However, an attorney is not required. ACT recommends that you engage an attorney if you’re developing a testamentary trust within your Will. As a legal document becomes more complex, it is a good idea to utilize professionals in the process. The cost to develop a Will with a testamentary trust may cost anywhere from $375 up to possibly $2,000 or more depending on the documents complexity.
The estimated costs provided are not guarantees of cost but a guide.
Able Account
ABLE Accounts typically a good option if the individual’s disability onset was prior to their 26th birthday.
The ABLE (Achieving a Better Life Experience) Act is a piece of legislation that allows individuals with disabilities to open special savings accounts for disability-related expenses. This legislation, which builds on the already existing 529 college savings accounts, ensures that all funds in this account can grow tax free as long as the funds are used for qualifying expenses such as education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention, and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and any other expenses approved under regulations.
Most importantly, the funds in this account do not count towards the asset/resource limit established by means-based benefit programs such as Medicaid and Supplemental Security Income. As with the SNT, the funds in these accounts are intended to supplement not supplant, government benefits.
Depending on the individuals situation, ACT recommends that you investigate how an ABLE account may assist you in managing your financial resources. ACT has information on ABLE to assist you in your investigation. (ABLE)
If you understand ABLE and would like to establish an account, click this (PAABLE LINK).
Sample Funding Scenarios
Following are a few general examples of common family and individual situations. This is not an exhaustive list. Your situation may have unique issues and may not be reflected in the scenarios provided. There also may be real property or other assets needing attention. ACT is happy to discuss your situation and assist you in developing your plan as well as connecting you to appropriate professionals when needed.
Our hope is that the following scenarios help you and your family gain a better understanding of how a SNT can be funded.
Minimal or no financial resources
Family has limited funds, Parent(s) work and have a modest income, retirement and life insurance no significant retirement or savings. Extended family have modest means but may want to help in a small way. Child (regardless of age) has no personal financial resources.
- Establish Third Party Trust (Pooled)
- Parents can establish or direct existing life insurance policy with the child’s trust as beneficiary
- Parents can have their retirement plan direct proceeds to their child’s Trust as beneficiary (retirement plans require careful consideration and typically need professional assistance to properly direct funds)
- Family and friends can provides gifts to trust
- Establish an ABLE Account
- If child’s disability is documented prior to their 26th Birthday
- Child, family and friends can deposit up to $15,000 per year total
- See ABLE Account Page for details
Limited family funds, child receives settlement
Family has limited funds, Parent(s) work and have a good income, savings, retirement and life insurance. Extended family have modest means but may want to help in some way. Child has significant settlement (over $100,000) or financial resource. What can be done in effort to assist?
- Establish First Party Trust (Special Needs Attorney required)
- In effort to protect Public Benefits
- Transfer funds from bank/investment account to fund Trust
- Establish an ABLE Account
- If child’s disability is documented prior to their 26th Birthday
- Child, family and friends can deposit up to $15,000 per year total
- See ABLE Account Page
- Establish optional Third Party Trust (possibly pooled depending on amount of resource)
- Parents can establish or direct existing life insurance policy with the child’s trust as beneficiary
- Parents can have retirement plan direct proceeds to their child’s Trust as beneficiary (retirement plans require careful consideration and typically need professional assistance to properly direct funds)
- Family and friends can provides gifts to trust
Family and child have financial resources
Family has strong financial resources, Grand parents will leave child resources upon their death, child is an adult and the disability took place after the age of 26. Child receives settlement or has personal funds. In Will and estate plan establish beneficiary process to fund third party SNT (professional planning is required to minimize tax implication and benefit security).
- Establish Third Party Trust (Special Needs Attorney required)
- Parents can establish or direct existing life insurance policy with the child’s trust as beneficiary
- Parents can have retirement plan direct proceeds to their child’s Trust as beneficiary (retirement plans require careful consideration and typically need professional assistance to properly direct funds)
- Estate plan and Will to fund Third party SNT – SNT can have alternative beneficiaries
- Family and friends can provides gifts to trust
- Establish First Party Trust (Special Needs Attorney required)
- In effort to protect Public Benefits
- Direct Settlement to fund SNT
- Transfer individuals personal funds from bank/investment account to fund Trust
Settlement for individual of modest amount
Individual receives a modest settlement (under $100,000) and has a job with modest income. Family has no financial resources.
- Establish First Party Trust (possibly pooled)
- In effort to protect Public Benefits
- Transfer funds from bank/investment account to fund Trust
- Establish an ABLE Account
- If child’s disability is documented prior to their 26th Birthday
- Child, family and friends can deposit up to $15,000 per year total
- See ABLE Account Page
Settlement for individual of small amount
Child/Individual receives small settlement (Under $25,000) and family has no current financial resources.
- Establish an ABLE Account
- If child’s disability is documented prior to their 26th Birthday
- Child, family and friends can deposit up to $15,000 per year total
- See ABLE Account Page
- Spend down the remainder through;
- Establish irrevocable Burial Trust
- Utilize balance of funds for immediate needs
- Purchase items that will benefit Childs/individuals life
- Establish Third Party Trust (Pooled)
- Parents can establish or direct existing life insurance policy with the child’s trust as beneficiary
- Parents can have retirement plan direct proceeds to their child’s Trust as beneficiary (retirement plans require careful consideration and typically need professional assistance to properly direct funds)
- Family and friends can provides gifts to trust
The scenarios provided are not an exhaustive list of examples, they are simply a few typical situations many families find themselves. ACT staff are available to address questions and concerns as well as assist you in identifying professional assistance when appropriate.
We hope these scenarios provide you with some ideas on how you, your loved one and family can plan for the future. Contact us today to see how ACT can play a role in enhancing the life and provide greater peace of mind to the beneficiary, you, your family and others responsible for their welfare.
Helpful Info
Reasons for a Special Needs Trust
A Special Needs Trust (SNT) can play an important role in a families plan for children with special needs. You any your loved one have options that can provide both independence and peace of mind. You may be wondering why should you establish a SNT or what are the benefits of establishing a SNT today. Additionally, you may have heard of the ABLE account program and are wondering if that option may be all you need. These are natural and great questions. ACT is here to assist you in your exploration and decision process. Below are links to some responses to these questions. Our desire to provide you information and resources through ACT’s website and from our knowledgeable and compassionate staff. If you have further questions or if you are unclear as to what a next step may be, please feel free to contact us directly.
PA ABLE
The “ABLE” account is a relatively new planning tool that offers an individual with disabilities a tax-free savings option (similar to a 529 College Savings Plan) that does not interfere with the individual’s eligibility for means-tested government benefits, such as Supplemental Security Income (SSI) and Medicaid. Special needs trusts (SNT’s) are well-established preservation tools that also protect eligibility for public programs.
Should you open an ABLE account or start a special needs Trust. That’s a good discussions and question to ask. But what can be more beneficial for your loved one and family is; How can I use both to maximize the benefit and impact of both options?
ACT Comparison-Guide-Trusts-and-ABLE-Accounts
An “Eligible Individual” Qualified To Have An ABLE Account Must Meet Two Requirements
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- You must have a qualifying disability. Demonstrated by one of the following:
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- Entitlement to Supplemental Security Income (SSI) benefits based on blindness or disability; or
- Entitlement to Social Security Disability Insurance (SSDI) benefits based on blindness or disability; or
- Self-certification of a similarly severe disability, if not entitled to SSI or SSDI. Demonstrated by the following:
- Blindness as defined by the Social Security Act (SSA); or
- A medically determinable physical or mental impairment with marked and severe function limitation that has lasted, or is expected to last, at least 12 continuous months or result in death; and
- Have a written disability-related diagnosis signed by a physician.
- The qualifying disability must have started prior to age 26.
Setting up your PA ABLE account
There are just three easy steps to open a new account.
- Read the Program Disclosure Statement
- Choose the best Investment Option for you
- Gather information
- Residential street address
- Social security or taxpayer identification number
- Birth date
- Your personal bank account number (to pre-schedule contributions from your personal checking or savings account)
Ways you may be able to fund a SNT
So you and your family are investigating establishing a Special Needs Trust (SNT) for a loved one, but are not sure where to start or what options may work for your family. You are not alone!
Select this link to see issues and funding scenarios that may work for you and your family or provide you with ideas that you may not have known about prior.
What can a SNT pay for?
A special needs trust is designed to cover the expenses of goods and services that are supplemental to a beneficiary’s basic needs (food and shelter). Basic food and shelter expenses should be provided through a beneficiary’s Social Security Disability payment or Supplemental Security Income. In addition, if a Third-Party Trust is established the creator (settlor) of the trust can establish limitations or requirements for the beneficiary in effort to assist them preserve the funds and protect the beneficiary.
Generally speaking, the Trust is the directing document that guides the Trust Administrator in distributing funds. On ACT’s Trust Distribution Page you will discover FAQ’s including a list of allowable uses of a SNT. Please keep in mind that the Trustee by law must have absolute discretion in reviewing requests for distributions. Therefore, you should not view this or any list as guarantees. Your trust document may also contain specific language regarding distributions.
Day-to-Day Services
Our day-to-day special needs trust services include, but are not limited to:
- Supervising all aspects of the trust and at all times acting in the beneficiary’s best interests;
- Offering a line of defense against undue influence from existing friends or family, outside caregivers, and new friends who may suddenly appear once a trust is funded;
- Abiding by the terms of the trust and reviewing each distribution against a standard of “reasonableness”;
- Taking custody of cash, maintaining transactional records for receipts and disbursements, preparing tax letters and tax returns for the trust, issuing account statements and providing accounting’s as required by the court as well as other outside authorities;
- Monitoring and reviewing the performance of the investment manager and making changes that are in the best interests of the beneficiary;
- Coordinating the payment of bills and expenses, and taking charge to follow through on implementing many of the services outlined in a care plan for the beneficiary;
- Maintaining relationships with other service providers in an effort to contain costs, including public benefit agencies and medical cost containment companies;
- Determining if it is necessary to purchase a vehicle or house and identifying the specific needs as well as coordinating the purchase;
- Coordinating payroll for caregivers recommended by a case manager, if such services are not provided by a private agency or Medicaid; and
- Supporting the implementation of recommendations made by a case manager to enable the beneficiary to receive the highest quality of care.
Glossary of SNT Terms
In almost every area of life and business individuals and professionals use terms and abbreviations that they assume everyone knows there meaning. It typically makes those trying to figure out what’s being said and what is being referenced at a disadvantage. To assist you ACT has accumulated a list of Trust terms and their meanings. We know there are terms being created everyday and we will try to keep the list current. We hope this helps you with your search.