Third Party Special Needs Trusts:
Planning to Protect a Loved One with Special Needs

Estate planning is especially vital for those who have loved ones with disabilities who depend on government benefits. This includes parents and grandparents of children with special needs and spouses and relatives of older individuals residing in nursing homes and assisted living facilities. Failure to plan comes at a very high cost for the individual with disabilities who may lose critically necessary public benefits if there is no estate plan.

Unfortunately, a poorly designed plan is as disadvantageous to a person with disabilities as failure to plan. In December of 2003, the North Dakota Supreme Court held that a grandchild with developmental disabilities was ineligible for Medicaid assistance because the inheritance left to him by his grandparent went into a support trust rather than a special needs trust. The child's parent sought to correct the problem by creating a special needs trust and transferring the assets to the new trust. The Court held that the assets were nonetheless available to the grandchild thereby rendering him ineligible for his government benefits. Linser v. Office of Attorney General (N.D. No. 20030184, Dec. 19, 2003).

Closer to home, the Maine Supreme Judicial Court sanctioned a Maine attorney who failed to include a special needs trust in the estate plan of a client. Board of Overseers v. Brown, BAR-01-06, October 25, 2002. The will prepared by the attorney bequeathed a portion of the decedent's estate to her sister whose illness required that she be cared for in a nursing home. The sister was financially eligible for Medicaid nursing home benefits until the receipt of the inheritance. A special needs trust would have maximized the inheritance, allowing the sister to remain eligible for Medicaid eligibility and yet have access, through a trustee, to the inheritance for goods and services to improve the quality of her life.

In both cases, the individuals who created their estate plans should have been advised to create special needs trusts. A special needs trust maximizes all available resources for the benefit of the individual with disabilities and can provide funds for the purchase, maintenance, and insurance for a customized, accessible motor vehicle; for experimental or alternative therapies not covered by MaineCare; for communication equipment and computers; for recreational activities, vacations, and hobbies; for education and occupational training; for companionship and pets; and for professional services, including services from a professional trustee, an accountant, or an attorney.

The type of trust that should have been created in the Linser matter would have been funded with the assets of the grandparent, not with the assets of the grandchild. That type of trust is typically called a "third party" trust as opposed to a "self-settled trust." It may be created during the life of the person creating the trust (called the Grantor or Settlor) or upon that person's death in his or her will. The assets of the person who created the trust are then held in the trust for the benefit of the individual with special needs (the Beneficiary). A special needs trust typically gives broad discretion over the administration of the trust to a Trustee. The beneficiary cannot serve as the trustee.

The "third party" special needs trust is not subject to the very strict legal requirements that govern the creation of a self-settled trust (see the section below regarding (d)(4)(A) trusts), including the payback requirement. That is, with a third party trust, if the beneficiary should die before the assets of the special needs trust are exhausted, the remaining trust property can be distributed to other family members or to charity.

Those who have loved ones with disabilities deserve the peace of mind that comes from a good estate plan that can maximize the resources of the loved one with special needs and improve the quality of his or her life.