Dissolving a Special Needs Trust
A Special Needs Trust (or SNT) is a trust where assets or money are set aside for a loved one with special needs (the beneficiary). This trust can help to pay for the beneficiary’s care without interfering with government benefits. This is a lawful way to ensure that your loved one is getting all of the government aid they are entitled to, but also benefits from gifts from a parent, grandparent or other loved one.
So what do you do when the loved one with special needs passes away? Or, in more rare instances, when their disability is ameliorated?
First step: determine what type of Special Needs Trust you are dissolving
To begin with, there are two primary types of Special Needs Trusts. Both can be used to supplement the beneficiary’s care when it goes beyond the scope of Medicare, Medicaid, and other government assistance. A first-party SNT is a trust funded by the beneficiary, and those funds often come from things like inheritance or legal settlements. The beneficiary must be under the age of 65 when this type of trust is set up. A third-party SNT is a trust funded by parents, grandparents, or other people looking to provide for the beneficiary. In order for it to be a third-party SNT, none of the assets in the trust can belong to the beneficiary.
Because first-party Special Needs Trusts involve hiding an individual’s own assets from government use, courts require more oversight of these in setting them up and dissolving them. In general, third-party SNTs require less court intervention when opening and closing.
Second step: follow the trust’s specific instructions for dissolution
An SNT agreement will typically include a provision stating what happens to any remaining assets after the beneficiary passes away. There may be other beneficiaries that will receive some of the assets. Pennsylvania law requires that SNTs help to reimburse certain costs after the beneficiary dies or in the event that the trust is terminated early. See 62 Pa. Stat. § 1414(b)(3)(iii). The Department of Human Services, and any other agency that provided medical assistance to the beneficiary, must be reimbursed from funds remaining in the trust. That reimbursement can be up to an amount equal to the total medical assistance paid on behalf of the beneficiary before any other claimant is paid. In other words, the government gets reimbursed before other medical providers.
Along with reimbursements, the trustee must pay any final expenses, taxes, and liens against the SNT before distributing any remaining assets to other beneficiaries. The trustee must also reimburse Medicaid for services rendered throughout the beneficiary’s life. If the SNT is under court supervision, the trustee must draw up a final account and obtain approval from the court before distributing any remaining assets.
When the SNT is terminated or when the beneficiary passes away, the trustee or co-trustee must notify the SNT Depository, a state agency that keeps track of dissolving SNTs.
Step three: distribute funds to other beneficiaries
Once the trust pays all past due amounts, the trustee generally obtains clearance certificates and can then distribute remaining funds to other, contingent beneficiaries. In some cases, the trust can also refund money to a “settlor” who gave money in the first place. Alternatively, in the case of death, the money may flow through an estate.
In most cases, it is recommended to seek Court approval of the plan of dissolution. By submitting the documents to the Court of Common Pleas, you can receive an Order of Court saying that you have followed the rules and are authorized to distribute. A petition is followed by a hearing and an order.
Depending on the amount of reimbursement required, dissolving an SNT can be a complicated process. Obtaining Court approval can be a difficult process—but we can help to simplify it. Call the trust attorneys at Cornerstone Law Firm today for help with your Special Needs Trust.