Key Elements of an Effective Special Needs Trust

When it comes to estate planning for individuals with special needs, a well-constructed special needs trust (SNT) plays a crucial role. In Tennessee, as in many other states, creating an effective SNT is essential for protecting the financial interests of a person with disabilities while allowing them to maintain access to essential public benefits. 

Located in Murfreesboro, Tennessee, McCarter | East PLLC focuses on helping individuals with special needs receive a trust tailored to their unique situation. This type of trust can safeguard the person’s future and help manage assets in a way that promotes their well-being without disqualifying them from necessary government assistance programs. 

Our firm will help you understand the key elements of an effective special needs trust, highlighting important considerations specific to Tennessee. Be sure to reach out for further information as needed.

Defining a Special Needs Trust

A special needs trust is a legal arrangement that holds and manages assets for the benefit of an individual with special needs. One of its primary functions is to allow the beneficiary to receive assets or income without losing eligibility for government benefits, such as Supplemental Security Income (SSI) and Medicaid. 

These programs have strict income and asset limits, which could disqualify the person with special needs if they receive too much money outright. An SNT, however, can keep these benefits intact by setting aside funds in a way that doesn’t count toward the individual’s asset limits. 

In Tennessee, this is especially important because SSI and Medicaid are vital programs for individuals with disabilities, helping cover medical expenses, housing, and other necessary services. 

Without a properly designed SNT, these benefits could be at risk. Therefore, understanding how to craft a trust that serves both the beneficiary's needs and complies with state regulations is a critical aspect of estate planning.

Types of Special Needs Trusts

There are generally two types of special needs trusts: first-party and third-party. Each has distinct characteristics, and choosing the right type depends largely on the source of the funds and the specific goals of the estate plan.

1. First-party special needs trust: A first-party special needs trust is funded with assets that belong to the beneficiary. This could include money from a personal injury settlement, an inheritance, or any other personal assets. 

In Tennessee, when someone with special needs receives a settlement or inheritance, those funds can be placed into a first-party trust. However, there are important requirements: the trust must be established before the beneficiary turns 65, and the state may seek reimbursement for Medicaid expenses upon the beneficiary’s death.

One of the key challenges with first-party SNTs is seeing that the trust language meets the specific criteria set by both federal and state regulations. This type of trust must be carefully crafted to avoid jeopardizing the beneficiary’s eligibility for important public benefits. However, there is another type of trust that may work instead.

2. Third-party special needs trust: A third-party special needs trust is funded with assets from someone other than the beneficiary, typically a family member or friend. This type of trust is often created as part of an individual’s estate plan to provide financial support for a loved one with special needs after the estate holder passes away. 

In Tennessee, a third-party trust doesn’t require the same payback provisions as a first-party trust. As long as the trust is structured correctly, the funds can be used for the beneficiary’s care without affecting their eligibility for government assistance.

Since third-party special needs trusts are often part of estate planning, they offer greater flexibility. Family members can direct how the assets are used, and there’s less concern about repaying Medicaid services after the beneficiary’s death. Choosing the right trust is an important step before deciding on a trustee.

Selecting a Trustee

Choosing the right trustee is one of the most important decisions when creating a special needs trust. The trustee has the responsibility of managing the trust assets and making decisions in the best interest of the beneficiary. 

In Tennessee, this role is vital because the trustee must be knowledgeable about both the beneficiary’s needs and the regulations surrounding public benefits. The trustee should be someone who can manage finances, understands the nuances of estate planning, and is committed to acting in the beneficiary’s best interest. 

In some cases, individuals choose a family member or friend to serve as trustee, but it’s also common to appoint a professional trustee, such as a trust company or an attorney, who has experience with special needs trusts. 

In Tennessee, the trustee must also be aware of the state’s specific regulations concerning Medicaid and SSI, as these can vary from other states. Additionally, it’s crucial that the trustee knows how to handle distributions from the trust. Money from an SNT cannot be given directly to the beneficiary, as this could affect eligibility for public benefits. 

Instead, the trustee can make payments for items or services that improve the beneficiary's quality of life, such as housing, medical expenses, education, or entertainment. Careful management is needed to avoid any action that could inadvertently disrupt government assistance.

Trust Language and Compliance With State Laws

An effective special needs trust must include specific language that complies with both federal and Tennessee state laws. This language is necessary to make sure that the trust won’t be considered a countable asset for SSI or Medicaid purposes. 

The trust document should clearly state that the funds will be used solely for the benefit of the individual with special needs and not for any purpose that could disqualify them from essential public benefits.

Tennessee law also requires that the trust be written in a way that prevents the beneficiary from having direct access to the trust funds. The trustee must have full discretion over distributions, which is a key element of maintaining the trust’s integrity and checking that the beneficiary remains eligible for government programs.

Estate planning professionals in Tennessee are familiar with the nuances of these requirements and can help design a trust that complies with both state and federal guidelines. Without precise language, the special needs trust could become invalid or expose the beneficiary to a loss of benefits.

Funding the Trust

Funding the special needs trust is another critical aspect of the planning process. In Tennessee, this could involve transferring assets like cash, real estate, or investments into the trust. For a first-party SNT, this funding usually comes from the beneficiary’s assets, such as an inheritance or a legal settlement. 

For a third-party SNT, the funding is generally provided by family members or friends. When funding a special needs trust, careful attention must be paid to the amount of money placed into the trust.

Overfunding the trust could inadvertently lead to problems with Medicaid eligibility, while underfunding might leave the beneficiary without sufficient resources to meet their needs. Estate planners often help clients assess the beneficiary’s financial needs and future requirements to determine the appropriate amount of funding. 

Additionally, regular reviews of the trust’s funding and assets are important to make sure the trust remains effective. As the beneficiary’s needs change over time, it may be necessary to adjust the funding or make provisions for new types of expenses.

Distributions From the Trust

An effective special needs trust provides a clear structure for how and when distributions can be made to the beneficiary. While the funds in the trust can’t be given directly to the beneficiary, the trustee can use the money to pay for services and goods that will enhance the beneficiary's quality of life. 

These might include medical care, transportation, home improvements, educational expenses, or recreational activities. One of the key elements of estate planning for a special needs beneficiary is that distributions must be carefully managed to avoid exceeding the guidelines set by public benefit programs. 

For example, if the trustee provides an excessive cash payment to the beneficiary or pays for goods that aren’t considered necessary or related to the beneficiary’s well-being, it could jeopardize their eligibility for SSI or Medicaid.

In Tennessee, this means that a trustee must act with discretion, checking that distributions are for the benefit of the beneficiary and compliant with the rules governing public assistance programs. The trustee must also keep accurate records of all transactions to demonstrate that funds are being used appropriately.

Enlist Experienced Legal Support Today

Creating an effective special needs trust in Tennessee requires careful planning, attention to detail, and knowledge of both state and federal regulations. Working with an experienced estate planning attorney from our firm can help. We serve Murfreesboro, Tennessee, and are conveniently located only a couple blocks from the courthouse. We’re also looking forward to opening a satellite location in Woodbury for even more client accessibility. Reach out to McCarter | East PLLC today to get started