Special Needs Trusts 101: A Glossary of Key Terms
When you’re first entering the world of Special Needs Trusts (SNTs) - also referred to as Supplemental Needs Trusts or Disability Trusts - the unfamiliar terminology can be overwhelming. But in order to understand the fundamentals of these trusts and make the appropriate decisions for your family’s needs, you need to be able to navigate the language used in this area. In this article, we’ll walk through some of the most common terminology you will come across 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 directs assets in a trust fund on behalf of a “beneficiary.” The trust document or trust agreement explains the trustee’s authority, how the trust should benefit the beneficiary, how it can be used, 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. An SNT is a type of specialized trust designed to enable a person with a disability (the “beneficiary”) to receive payouts from a trust while helping to preserve access to public benefits such as Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), HUD/Section 8 subsidies, Medicare, and/or Medicaid.
There are a number of individuals and entities that touch an SNT; here are the most common terms used to describe these parties and their relationship to the trust:
- 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 could 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, the state’s Medicaid division must often be the first remainder beneficiary.
- Trust protector, trust advisor, care committee: 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 advise the trustee on how to utilize 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 after a parent is gone.
Types of Trusts
SNTs come in three common types: third-party trusts, first-party trusts, and 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.
- Pooled trust: Also known as a (d)(4)(C) trust, a pooled trust uses first- or third-party assets to establish an account for the beneficiary within a larger trust. This trust pools assets from multiple beneficiaries and is administered by a nonprofit organization. A pooled SNT has a master trust agreement which a beneficiary or the trust grantor may use through a joinder agreement. This may save the beneficiary or grantor in legal drafting fees.
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 generally 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.
- 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 and many pooled trusts, states often have the right to be reimbursed for the amount of paid Medicaid benefits on behalf of the beneficiary. In almost every case, these types of trusts must contain payback provisions in order for the beneficiary to avoid a loss of government benefits due to excess resources. Any remaining trust assets in excess of the payback amount may be distributed as designated within the trust document when the trust is set up.
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 draft and establish the 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.