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Establishing a special needs trust in Pennsylvania

On Behalf of | May 29, 2023 | Estate Planning, Special Needs Planning |

Caring for an elderly relative in Pennsylvania comes with some rewards but also many challenges. Those needing to establish a trust to provide financial security for their loved one probably have a lot of questions about the procedure and options.

The most common type of legal instrument to establish financial assistance for the care of a disabled or incapacitated adult is a special needs trust.

What is a special needs trust?

Also known as a supplemental needs trust (SNT), special needs trusts are protective instruments that are part of estate planning for the elderly or disabled adults. These could be individuals with access issues or those with special medical requirements.

A special needs trust can be created as a first-party, third-party, or pooled trust. The first two are established to benefit individuals, while a non-profit or other organization usually sets up the third to benefit a specific community.

Such a trust aims to set aside money to cover financial needs like rent or gap insurance without disqualifying the individual for government-funded programs like Medicaid, Medicare, or Social Security. These benefits are known as needs-based government assistance, and they have strict income limitations to qualify.

The benefits of a special needs trust

Because many elderly residents of Pennsylvania live on a fixed income, anything that impacts their ability to obtain additional assistance will also impact their quality of life. Under Pennsylvania estate law, trusts are designated as revocable or irrevocable, and there are tax implications involved in how they’re established.

In general, irrevocable trusts are designated as separate taxpayers, and the settlor needn’t declare the proceeds as income. Special needs trusts fall under this designation.

How to set up a trust in Pennsylvania

The settlor or their caregiver can use special needs trusts for any purpose. Deciding which type of trust to establish depends on the situation.

Establishing a trust is a three-step process:

  1. Designate a beneficiary, either the grantor who will benefit or a third-party
  2. Name a trustee to administer the trust
  3. Draft and sign the establishment papers and file them

Once all of that is completed, the trust can be funded with money, property, and other assets.

A third-party trust is set up by someone other than the beneficiary, either as a standalone to grant access to funds during the beneficiary’s lifetime or as a testamentary trust as part of a last will and testament.

The first-party trust is established by the beneficiary when they are of sound mind, and they’re used to cover expenses. Upon the beneficiary’s death, any remaining funds would be used to reimburse for government-funded medical insurance. Any remaining funds would be dispensed to the legal heirs.