Special Needs Trusts 101: A Glossary of Key Terms
When you first enter the world of Special Needs Trusts (SNTs) - also referred to as Supplemental Needs Trusts or Disability Trusts - the unfamiliar terminology can be overwhelming. But to understand the fundamentals of these trusts and make the appropriate decisions for your family’s needs, you need to be able to speak the language used in this area. In this article, we’ll walk through some of the most common terminology you will hear when establishing and administering an SNT.
First off, what is a Trust?
A trust is a legal arrangement in which a third party, a “trustee,” holds and manages assets for the benefit of a “beneficiary.” The trust document or trust agreement explains the trustee’s authority, how the trust assets should be used for the beneficiary and other essential information.
So, what is a Special Needs Trust?
There are many types of trusts, but this glossary is focused on a specific type – the Special Needs Trust. A SNT is a specialized trust designed to enable a person with a disability (the “beneficiary”) to benefit from assets held in the trust without jeopardizing eligibility for public benefits such as Supplemental Security Income (SSI), HUD/Section 8 subsidies, and/or Medicaid.
There are a number of individuals and entities involved with an SNT. The most common terms used to describe these parties and their relationship to the trust are:
- Grantor: A grantor is the person who creates and funds the trust, also commonly referred to as a “settlor” or “trustor.” Depending on the type of trust (more on that below), the grantor may be a third–party, like a parent or other family member, or the grantor may be the beneficiary in the case of a first-party trust.
- Trustee: A trustee is the person or entity who manages the trust assets and administers them according to the trust document. You can name a family member or friend as trustee, or select a professional to act as trustee – this could be an attorney, a financial institution, a nonprofit organization administering a Pooled Special Needs Trust, or another fiduciary.
- Successor Trustee: If the initial trustee is no longer able or willing to serve, a successor trustee is nominated to take over. Typically, this successor trustee must satisfy certain requirements before assuming the trustee role.
- Beneficiary: A beneficiary is the person for whose benefit the trust is established. So, in the case of SNTs, a person with a disability would be designated as the beneficiary of the trust.
- Remainder beneficiary: When a trust ends (usually upon the beneficiary’s death), the remainder beneficiaries are the individuals who will receive any remaining trust assets. Note that for first-party SNTs, prior to any beneficiaries receiving any payment, the state’s Medicaid agency must be repaid for any medical assistance provided to the beneficiary during the beneficiary's lifetime.
- Trust protector, trust advisor, care committee, advocate: No matter what term you use, it can be valuable to identify an individual or group who will help oversee the work of the trustee. The committee is typically composed of caregivers, doctors, social workers, family members, lawyers, and other advocates who understand the beneficiary’s needs and can help ensure financial planning is person-centered. The committee members provide input to the trustee about using the trust assets for the beneficiary’s best interests; although, the trustee usually retains the ultimate authority over how funds are used. This committee can also provide guidance for the beneficiary in cases of supported decision-making.
Common Types of Special Needs Trusts
SNTs come in several common types: third-party trusts and first-party trusts, and both types of trusts can stand-alone or be pooled trusts; here are the key characteristics of each option:
- Third-party trust: These types of trusts are funded with assets from a third-party that never belonged to the trust beneficiary. Generally, when a parent or guardian wishes to establish and fund a trust for the benefit of a minor child, they will set up a "third-party" SNT.
- First-party trust: When the beneficiary of the trust has their own assets, a first-party SNT may be more appropriate. Also called a (d)(4)(A) or “self-settled” trust, these types of trusts are often funded by an inheritance or legal settlement. First-party SNTs must be for the beneficiary’s sole benefit.
- Pooled trust: Pooled trusts pool the assets from multiple beneficiaries for investment purposes but each beneficiary has a unique accounting of their own assets. Pooled trusts are administered by a nonprofit organization. A pooled SNT has a master trust agreement that establishes the trust, and a beneficiary or the trust grantor may join the trust by completing a joinder agreement. These trusts may save the beneficiary or grantor legal fees and smaller account sizes are usually accommodated. Pooled trusts can be first-party or third-party.
Other Terms to Know:
- Revocable vs. Irrevocable trusts: A revocable trust (sometimes known as a “living trust”) can be revoked or changed, while an irrevocable trust cannot. These differ in how they are structured and taxed, and each offers advantages and disadvantages depending on their purpose. While all first-party SNTs must be irrevocable; a third-party SNT can sometimes be either irrevocable or revocable. In the case of a revocable trust, the grantor has the power to revoke or change the terms of the trust at any time prior to death.
- Testamentary trust: This type of trust is created under a last will and testament and is not funded until the death of the person who created the will. A testamentary trust can only be a third-party SNT.
- Inter vivos: A Latin term meaning “among the living” or “during life,” an inter vivos trust is a trust that’s established during the lifetime of the grantor. All first-party SNTs are inter vivos.
- Payback trust:In the case of first-party SNTs, the state Medicaid agency must be reimbursed for the amount of Medicaid benefits that were paid on behalf of the beneficiary. Any remaining trust assets in excess of the repayment may be distributed as designated within the trust document. In the case of Pooled trusts, the nonprofit organization is allowed to, and often does, retain some or all of the assets without Medicaid repayment.
Familiarizing yourself with common SNT terminology is a great place to start, but don’t be afraid to ask questions of the professionals who are helping you establish trust. Language can vary by state, trust type, and trust agreement, so it’s important to speak up and request clarification when something is unclear.