Special Needs Trust (“SNT”)
This is a protective trust for a disabled person. A SNT should be irrevocable, and can be set up while the settlor is alive (a “stand-alone SNT”) or it springs into being upon the settlor’s death, from the revocable living trust (a “testamentary SNT”). The settlor and initial trustee is typically the parent or other family member, and the beneficiary is the disabled person.
The main purpose of a SNT is to protect needs-based public benefits for the disabled beneficiary. All of the assets held in the trust are for the benefit of the beneficiary, but the beneficiary cannot change the trust or act as trustee. Because someone else besides the beneficiary has control over the trust assets, the assets in the trust are not considered the beneficiary’s countable assets for public benefits purposes, and the beneficiary can continue to qualify for benefits such as SSI and Medicaid (Medi-Cal in California).
A stand-alone SNT is usually set up with a minimum amount in it, say $10. This is called a “seed trust”. Once the trust is “funded”, that is, substantial assets are transferred into the trust, the trustee needs to get a tax ID number and start filing fiduciary income tax returns.
Lifetime Trust or Dynasty Trust
This is a protective trust for just about anyone. Like the SNT, this type of trust is irrevocable, and it can be set up as a stand-alone trust (while settlor is alive) or a testamentary trust (created from revocable trust upon settlor’s death). Typically the settlor is the parent of the beneficiary, and the beneficiary or a third party can act as trustee. Once funded, the trustee needs to obtain a tax ID number and file yearly income taxes.
This type of trust provides 3 major benefits:
- All assets held in the lifetime trust are not considered part of the beneficiary’s “estate” so they remain with the beneficiary if he or she endures a divorce – it’s like doing a prenup or postnup for your loved one
- There is a high level of creditor protection for assets held in a lifetime trust, as long as the beneficiary is not acting as trustee of the trust
- When the beneficiary dies, assets held in the trust pass to the beneficiary’s children free of estate taxes. Because of this, these types of trusts are also called “GST” (or Generation Skipping Transfer) Trusts.
Unfortunately, you cannot set up a lifetime trust for yourself or your spouse in California – it is more difficult to do this type of planning (called “asset protection planning”) in California. If interested, you can set up a Dynasty Trust in another state that offers more relaxed laws on asset protection, such as Nevada, Alaska or Delaware.