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Irrevocable Special Needs Trusts (SNTs)

Before we get into the nuts and bolts of irrevocable special needs trusts, we need to first understand the terminology:

Trust: A legal document that describes the processes and procedures where a settlor or grantor transfers his or her assets to a trustee, who manages the assets on behalf of a beneficiary. Trusts can be either revocable/living trusts or irrevocable trusts. Here, we are only discussing irrevocable trusts, and specifically irrevocable special needs trusts.

Settlor or Grantor: The individual who establishes the trust or transfers property to a trust.

Trustee: A person or corporation who manages a trust for the benefit of a third person, the beneficiary, pursuant to the terms of the trust.

Beneficiary: A person who receives assets from a trust. With a special needs trust, the beneficiary is usually disabled and receiving some sort of government assistance, such as Medicaid and Social Security.

An irrevocable special needs trust is an estate planning device used to pass assets on to a special needs or disabled child while the special needs or disabled child retains their ability to qualify for government assistance, such as Medicaid or Social Security.

Under various Medicaid, Social Security, and state laws, leaving assets directly to a child could potentially disqualify them for the government assistance they receive.

However, by giving up the ability to amend, change or alter the special needs trust, you must be certain that the irrevocable trust is set up in a way that makes sense not only in the present time, but also well into the future.

Advantages to an Irrevocable Life Insurance Trust:

(1) Assets held by an irrevocable special needs trust are generally not subject to the grantor's and beneficiary's creditors' claims. This provides significant asset protection advantages to both the grantor and the beneficiary.

(2) An irrevocable special needs trust can retain a disabled or special needs child's ability to qualify for government assistance, such as Social Security and Medicaid.

Disadvantages to an Irrevocable Life Insurance Trust:

(1) A will is still necessary. A pour over will is still required if you have an irrevocable life insurance trust. This is required because an irremovable special needs trust cannot appoint a guardian for minor children like a will.

(2) In Maryland, all irrevocable special needs trusts must be reviewed and approved by the Attorney General's Office. In Pennsylvania, all special needs trusts must be reviewed and approved by the Department of Public Welfare, Office of General Counsel. Failing to secure the irrevocable special needs trust's approval can pose numerous tax and legal consequences.

(3) The irrevocable special needs trust must be established before the beneficiary reaches 65 years of age and no additional contributions may be made to the trust after the beneficiary turns 65 years old.

(4) Irrevocable special needs trusts cannot be altered, amended or changed. This includes changing the beneficiaries or the trustees.

(5) An Achieving a Better Life Experience (ABLE) account may be approrpriate as a substitute for, or in addition to, an irrevocable special needs trust. However, you will need to consult with an attorney to determine how an ABLE account can fit into your special needs estate planning.