When estate planning, one of the main considerations of individuals is their financial security if they ever face disability. For this reason, many consider creating a special needs trust (SNT) for themselves, specifically the first-party SNT. However, since the law previously allowed only parents, grandparents and guardians to create first-party SNTs, some people have hesitations to make one for themselves now.
Individuals can now create their own first-party SNT
Fortunately, lawmakers revised the special needs trust law in 2016 to allow mentally and legally capable individuals with special needs to create their own special needs trust. By doing so, the individual, who is also the beneficiary, funds the trust with their own assets. Individuals usually use this type of SNT if:
- They directly receive an inheritance, life insurance proceeds or a gift.
- They obtain personal injury or any legal settlement for their disability.
- They owned assets before their disability that would make them otherwise ineligible for government assistance benefits.
All assets in this trust will only be for the beneficiary’s sole benefit.
What are the limitations of this type of SNT?
Before an individual can make a first-party SNT, they must meet the following criteria:
- They must meet the government’s definition of being “disabled.”
- They must be under 65 years old when they created and funded the trust.
Moreover, individual first-party SNTs must include a clause naming the state as a remainder beneficiary upon the beneficiary’s death. This means the remaining assets in the trust will be used to repay the total lifetime medical assistance benefits from the government.
Preparing for a self-settled SNT
This type of trust can be tricky since it involves specific requirements and limitations. Any mistake in its creation can cause serious consequences for the beneficiary. It is essential to ensure one’s eligibility and carefully prepare the requirements to ensure the smooth creation of the special needs trust.