Revocable Trusts

Special Needs Trusts

When you create a revocable trust, and title assets in the name of the trust, those assets should pass outside of the probate process.  This means your named beneficiaries can get assets without going through the probate process and interfacing, or dealing, with the courts.  Oftentimes this makes the process of transferring assets simpler and easier for your survivors.  However, if you put your assets into a revocable trust, you are not protecting assets from lawsuits, long term medical costs, or other creditors who may try to collect assets.

Assets held in a typical revocable trust are fully available to the person who created the trust and who is the primary beneficiary, if that is the same person.  You can create a revocable trust with a separate beneficiary other than yourself while you are alive, but to get any asset protection for the separate beneficiary, you would need to create some sort of provision for the asset protection, like a special needs trust.

A special needs trust can avoid probate, just like a revocable trust.  When you create a special needs trust, you can also set up asset protection.  You can set up a special needs trust as a revocable trust, or an irrevocable trust.  If you create a revocable trust, you are not provided asset protection, but the beneficiary you name to receive assets in special needs trust can have asset protection.  The funds that are held in a special needs trust are kept separate from the special needs individual and that separation can keep the assets safe.  A properly structured special needs trust means that if a special needs individual, who is a beneficiary, incurs a debt, the creditor cannot reach the assets in the trust.

In addition, many special needs individuals are receiving financial assistance from a government program with an asset limit.  If such a person were to receive a large lump sum of assets, then the special needs individual may lose the government assistance.  This is often the exact desire that someone is trying to avoid when setting up a special needs trust.  When assets are put into a special needs trust, the assets are not counted as an available resource to the special needs individual.  The asset can be used for the use and benefit of the special needs individual, but because a special needs trust provides a legal separation of the assets from the special needs individual, the assets held in the special needs trust can be preserved for the special needs individual and the government benefit can also be preserved and continue paying to the special needs individual.

This is a fairly obvious statement, and is somewhat circular, but to contrast a revocable trust with a special needs trust, I wanted to state this obvious fact.

If you set up a special needs trust that is revocable, you are likely establishing the trust for someone else.  A revocable trust set up for your own use as a special needs trust will likely not accomplish what you are trying to do.  If you are the special needs person, then establishing an irrevocable trust would make the most sense.  You can create the irrevocable trust to create the legal wall of separation from you and the assets, as an irrevocable trust can provide the legal separation of assets you need to protect the assets.  In setting up such a trust, you need to consider any transfer rules or restrictions involved in moving assets into an irrevocable trust.

For instance, if you are trying to protect assets from long term medical care costs, you need to transfer assets into an asset protection / irrevocable / and possibly a special needs trust more than 5 years before you apply for Medicaid assistance, otherwise Medicaid will count the asset transfer against you. Other programs have different rules, and you will need to consider whether a transfer of assets will work, or will not work for you.  I have many clients who receive money through an inheritance, and they want to put that money into a special needs trust, or an asset protection trust.  We can often make this situation work, as inheritance assets can often be directed somewhere other than directly to the individual.

However, if someone is already receiving assistance from a government program, and that person transfers assets out of their name, then they may run the risk of assets being counted against them.  You need to consider the specific rules of the specific program you receive assistance from to know if such a transfer of assets to a trust would be beneficial to you.  I must admit I am not familiar with all available government programs, so I cannot say for certain that a special needs trust would work for all programs.

In fact, I know of some programs where a special needs trust will not provide the asset protection you may need.  To know if a special needs trust will work, you need to know the specifics of the program helping you or your beneficiary.

Not every revocable trust has the same form, or the same provisions for distributing assets.  However, most revocable trusts are set up by one person, with the same person as trustee, and the same person as the primary beneficiary.  In this way, the same individual keeps control of all assets.  Asset protection, if any, is only offered to the named beneficiaries, if such protections are built into the trust language.  Special needs trust provisions for a beneficiary may be included in a revocable trust, or other protective clauses for a beneficiary, such as restrictions on assets being distributed to a person who may be divorced, to protect against an ex-spouse getting assets, or other protections for beneficiaries when the original individual who set up the trust passes away.

3. Special Needs Trust May Be Set Up Differently for Different Situations

You can set up a special needs trust for your beneficiaries when you pass away, or you can set up a special needs trust for your beneficiary now.  Such a special needs trust is referred to as a third party trust, because the special needs person is not the one who sets up the trust.  Instead, the trust is established by someone who is not the special needs person and is administered by someone who is not also the special needs person.  Thus, the third party trust designation of this type of special needs trust.

A special needs person can set up their own special needs trust, referred to as a first party trust, under certain circumstances.  A first party trust can provide asset protection while the special needs person is alive, but when that person passes away, the remaining assets in a first party trust will likely need to be transferred to the government program that paid for the special needs individual’s life and care while the special needs individual was alive.

Using a third party trust can preserve assets inside of the trust and pass them on to other individuals, and not the government, so it is often advantageous to use a third party special needs trust.  Of course, a third party trust does not work for everyone, and sometimes a third party trust is just not possible, so you want to consult with an experienced attorney to discover which type of trust would work best for your situation.