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Jan 23, 2025

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Spotlight on Special Needs Trusts: Everything You Need to Know about SNTs

By Lisa A. Cohen, CEO of Visible National Trust

Special needs trusts are the cornerstone of disability estate planning, and disability affects many more people and families than we might expect. Incorporating special needs trusts into estate planning brings certainty that families’ wishes will be implemented for their loved ones. 

Visible National Trust serves families and individuals across the country with complete turnkey special needs trust solutions that meet families’ high service standards and evolving needs. 

Seventy (70) million Americans live with a disability, according to the CDC. Twenty-three (23) million people with disabilities require lifetime support, affecting seventeen percent (17%) of US households.* This specialized market segment is meaningfully larger than a “niche” market.

For families that include a loved one with a life-altering disability, estate planning includes arranging for their loved one’s long-term, intergenerational care. Special needs trusts (SNTs) are the infrastructure for managing the financial components of this care, and they are suitable for most estate sizes. There is no limit on contributions to a special needs trust.

Special needs trusts provide asset protection for families, and they support continued eligibility for benefits. As costs for care have increased geometrically, consolidating assets for this purpose is crucial. Funds outside special needs trusts risk tripping spend down requirements and loss of benefits, a costly misstep. In some situations, there may be tax benefits to shifting assets into a special needs trust.

An Evolving Landscape

While you don’t need to be a special needs trust expert to identify the need for one, having some background information and a few key details is helpful as you talk to clients.

Big picture, client needs and industry capabilities are changing the way special needs trusts are provided. Consumer demand for the financial tools and information access found in other types of financial accounts is helping to expand the historical primary provider universe beyond attorneys, large banks (with large account minimums), and community nonprofits. Artificial intelligence, the ability to visualize estate plans, and the changing role of wealth advisors in estate planning are all shifting the value proposition of special needs trusts toward transparency, access, reasonable fees, and higher service levels.

Before this shift, though, the focus for special needs trusts had been on drafting documents that would become trusts later. As a result, there are loads of testamentary special needs trust documents that have been drafted as stand-alone trusts or as sub-accounts in family revocable trusts. Trustees named in these documents may choose – potentially decades later – to decline these trusts because of asset size, relationship, administrative reasons, or something else. The trustee, services, and costs are unknown until the testamentary trust is stood up.

The alternative, establishing a special needs trust with a trustee who will get to know the family and the person with the disability now, is increasingly appealing. Knowing and collaborating with the people involved is a great comfort and helps families feel confident that their loved one will be well cared for. Families also appreciate fully understanding the structure, costs, tools, and solutions delivered by their chosen trust provider. 

Simplifying Special Needs Trusts

The source of funding for a special needs trust defines special needs trust type. Trusts funded by a grantor (donor) who is not the beneficiary are Third-Party special needs trusts. Trusts funded by the beneficiary themselves are First-Party trusts. First-party trusts are subject to Medicaid recapture, third-party trusts are not.

You can think of special needs trusts – both types – as discretionary trusts that also comply with Medicaid rules. First party special needs trust distributions must be made for the sole benefit of the beneficiary, so likely cannot pay for travel companions who are not also caregivers, for example. Third party trusts are held to a slightly different standard that focuses on the beneficiary’s enjoyment of life and so have more flexibility. Income that exceeds distributions is taxable and these taxes are usually paid by the trust.

Both types comply with Medicaid rules so that beneficiaries remain benefit eligible. This is important when trust funding is finite and known, lifetime care costs are not, and the beneficiary may currently use or someday need benefits. 

There are two business models for delivering special needs trusts, individual and institutional, also known as “pooled.” The steps in building and managing a special needs trust are the same for both models; institutional providers build their trustee and trust administration infrastructure once and provide it to many clients. Individual trusts are operationalized one at a time. The scalability of the institutional model drives costs down and the quality of resources up. 

Governance of special needs trusts is different depending on whether the trustee is an individual (attorney, family member, etc.) or a corporate (institutional) trustee. Individual trustees are not likely to have regulators looking over their shoulders, though they are responsible for investment supervision and management and keeping up with changes in the trust code. State Bar Associations have responsibility for attorney oversight.

Institutional trustees (those using the “pooled” model) are subject to regulatory supervision by institutions including the SEC, the IRS, the Social Security Administration, and the AG’s office of the state in which they are incorporated. Because the trustee entities for pooled trusts are nonprofits, they are not registered with the SEC.

What else should I know?

Achieving a Better Life Experience (ABLE) accounts are tax-deferred, self-managed accounts for saving and spending on qualified disability expenses, so they have a very different function from special needs trusts. Account holders are responsible for managing the account, investing the funds, and making sure that distributions comply with applicable rules. Introduced in 2016, they are being used primarily as spending accounts rather than for asset accumulation.

Institutional (“pooled”) special needs trusts can accept Inherited IRA accounts for eligible designated beneficiaries (those who are disabled or chronically ill). These inherited IRA accounts are eligible for lifetime distributions. To optimize this benefit, the named beneficiary on the original IRA should be the disabled person’s trust account, not the actual person. This is true of other assets inherited by the beneficiary of a special needs trust – it is best for them to go directly into the trust without the beneficiary personally receiving them. If this doesn’t happen, tax benefits may be lost, income and asset tested benefits may be at risk, or the inherited assets may need to be spent down.

To learn more about Visible National Trust, visit our website.

The information provided here does not constitute legal, financial, or tax advice. It is provided for general informational purposes only. This information may not be updated or reflect changes in law. Please consult with an estate attorney, financial advisor, or tax professional who can advise as to your particular situation.