An integral part of estate planning is the establishment and management of trusts. In addition to their tax benefits, trusts can help provide for their beneficiaries, ensuring financial security for the foreseeable future. For instance, a donor in Connecticut could fund a trust, and the trustee could transfer these funds to the beneficiary in accordance with the donor’s wishes.
A unique type of fund that aims to assist people with special needs is a special needs trust, the benefit of which lies in its ability to manage assets for the beneficiary without compromising their access to benefits they get from the government. With that in mind, special needs trusts can be categorized into one of three types: a first-party trust, a third-party trust and a pooled trust.
Each type of special needs trust behaves differently, and this becomes all the more apparent when it comes to how these trusts interact with government benefits, such as Supplemental Security Income. A case in point is how a first-party trust enables a beneficiary to enjoy both the assets in their trust as well as the income from the SSI, yet upon the beneficiary’s passing, any assets remaining in the trust are used to pay back the government. Alternatively, a third-party trust, which is often established by the beneficiary’s family members, does not contain a payback provision, meaning that although the beneficiary can supplement their SSI with the assets from the trust, the trust does not have to reimburse the government back upon the beneficiary’s death. Finally, a pooled trust is similar to a first-party trust but contains the assets of more than one beneficiary. This is done for investment purposes.
Each special needs case is unique, requiring planning to satisfy its unique circumstances. Drafting trusts also needs to take into consideration how it will affect the donor’s taxable income and how the government will react to the transfer of assets. Therefore, anyone thinking of starting a special needs trust may wish to reach out to an experienced lawyer to help them achieve their goals.