How third-party special needs trusts receive family wealth

Identify whose assets will fund the trust

Property already belonging to the beneficiary does not become someone else’s property merely because another person establishes the trust. Trace ownership before describing family money as third party funding.

For an irrevocable trust mixing the individual’s or spouse’s assets with other people’s assets, the SSI statutory trust rule applies to the portion attributable to the individual or spouse.

Review beneficiary control before assuming SSI resource exclusion

Under SSA guidance, trust principal is not the beneficiary’s SSI resource when the beneficiary cannot revoke or terminate the trust or direct its assets for personal support and maintenance.

That determination depends on the trust instrument and applicable state or Tribal law. An enforceable right to payments that can be sold requires separate resource evaluation.

A third party grantor’s power to revoke the trust does not, by itself, make the principal the beneficiary’s resource. Resource exclusion also does not settle how trust payments affect SSI income.

Distinguish an outright inheritance from family trust funding

Under SSA guidance, an inheritance becomes income in the first month it has value and can meet the heir’s food or shelter needs. Until both conditions exist, the inherited item or right is neither income nor a resource.

Receipt depends on regional instructions addressing state law. Without those instructions, SSA uses the earlier of the individual’s alleged receipt or estate closure.

Property already treated as the individual’s resource immediately before the death is not inheritance income. An inherited house used as shelter receives presumed maximum value treatment in the receipt month.

Retained property requires a separate resource review. SSI resources generally include owned cash and property that the individual has the right, authority or power to liquidate for support and maintenance.

Property rights that cannot be liquidated are not resources under that definition. Statutory exclusions, including the home exclusion, also apply.

For your planning discussion, list proposed gifts to the trust separately from property the beneficiary already owns or expects to inherit outright.

Coordinate a will with the trust’s written terms

In Minnesota, for example, a will may devise property to an identified existing or future trust through the permitted establishment routes and written terms described here, regardless of the trust’s corpus. Other states differ.

The permitted routes include establishment during the testator’s lifetime by the testator, the testator with another person, or another person. They also include establishment at death by the testator’s devise to the trustee.

The written terms must appear in a nonwill instrument executed before, with or after the testator’s will, or in another individual’s will if that individual predeceased the testator.

Amendability, revocability and later amendment do not invalidate the devise. Unless the will provides otherwise, revocation or termination of the trust before the testator’s death causes the devise to lapse.

Bring the will and trust instrument to the same review so the adviser can compare the trust’s identification and written terms.

Evaluate what the trust pays for and who receives it

SSA trust guidance identifies educational expenses, therapy, transportation, professional fees, uncovered medical services, phone bills, recreation and entertainment as examples of payments to third parties that may not count as income.

These examples are potentially nonincome payments, not automatic exclusions for every purchase with one of those descriptions.

Noncash items other than food or shelter are income if they would not be partially or totally excluded nonliquid resources when retained into the month after receipt.

Shelter payments need their own review

Shelter provided by another person, including trust payments for shelter, can constitute SSI in-kind support and maintenance. Covered shelter includes room, rent, mortgage payments, real property taxes, heating fuel, gas, electricity, water, sewerage and garbage collection.

Room or rent is not such support under a business arrangement when required monthly rent equals or exceeds the presumed maximum value.

Below that threshold, the regulation imputes the difference between required rent and the lower of the presumed maximum value or current market rental value. Separate valuation rules and exclusions also apply.

For the trustee’s payment review, distinguish payments to service providers, purchases of property, shelter expenses and cash paid to the beneficiary.

Keep the Medicaid payback conclusion narrow

The Medicaid payback condition in the statutory individual asset trust exception does not itself impose payback on a trust funded entirely with another person’s assets.

This conclusion concerns that federal trust subsection only, whose definition requires use of the individual’s assets. For mixed funding, the subsection applies to the portion attributable to the individual.

This does not establish exemption from other recovery claims or the trust’s own terms. SSA guidance recognizes residual beneficiaries whose entitlement depends on an event such as the primary beneficiary’s death, without determining a particular trust’s remainder recipients.

Include the remainder provisions and funding records in your document review.

Two related terms

Third party special needs trust: A trust funded with property belonging to someone other than the beneficiary or the beneficiary’s spouse. Its name alone does not establish benefit exclusion.

First party special needs trust: A trust containing the assets of the person with a disability. A statutory exception to benefit trust rules requires additional conditions beyond that funding description.

Four EstatePlanner.com resources to open next

• How special needs trustees manage assets and benefits

  Open this next when your question shifts from who will fund the trust to how the trustee will handle it. Use it to prepare an administration discussion alongside the payment categories above.

• Trust funding records and questions checklist

  Use this checklist to organize the ownership and funding records for each proposed contribution. Bring it to the review of family gifts, estate instructions and the trust instrument.

• How ABLE accounts work alongside special needs trusts

  Read this guide when your family also wants to discuss an ABLE account. Keep those coordination questions beside your trust payment questions for the adviser.

• Disability, family wealth and elder care checklist

  Choose this checklist for a broader family meeting covering care plans, benefit decisions, disability evidence and authority records. It helps assemble the context around the inheritance and trust documents.

An Investor Advantage perspective on visibility

For a family considering how to follow investment activity, this speaker’s experience offers a useful discussion prompt about access to information.

"But we gave them access to an online portal, and there's an app that can be connected through there. So they can go in and look at any time what the performance of the operation is doing."

Common questions