Types of Special Needs Trusts  in New Jersey

Major Distinctions

Two major distinctions may be drawn among all special needs trusts.  A special needs trust will be either “Third Party Trust” or a trust created pursuant to the provisions of the Omnibus Budget and Reconciliation Act of 1993 (OBRA 93).  You may initially determine whether a special needs trust is a Third Party Trust or an OBRA 93 Trust by looking at the source of the assets used to fund the trust.  If the assets used to fund the trust do not belong to the beneficiary, or if they are not deemed to belong to the beneficiary, then the trust is a Third Party Trust.  In other words, Third Party Trusts will always be established by someone other than the beneficiary and with funds in which the beneficiary has no ownership interest.

Third Party Trusts in New Jersey

There are two general requirements for transforming a more traditional trust into a Third Party special needs trust.  First, these trusts must be established by someone other than the trust beneficiary.  Third Party Trusts are usually established by parents of adult children, grandparents, aunts, uncles, siblings, friends, or any other independent party with no legal duty to support the trust beneficiary.  A spouse cannot be considered a third party.  The second key requirement is that these trusts must be established with funds in which the beneficiary has no ownership interest.  Third Party Trusts can be more easily adapted to the needs and wants of the person creating the trust and can therefore be part of a more traditional estate plan.  They can be revocable or irrevocable, and most significantly, do not require any “payback provisions”.  Payback provisions are explained in the last part of the section which follows immediately below.

Disability Trusts in New Jersey

These trusts are also referred to as (d)(4)(A) trusts, which alludes to where they can be found in the Federal statute that authorizes them.  Due to common usage, this is usually the type of trust most people are referring to when they use the term “special needs trust”.  To establish a valid Disability Trust in New Jersey, it must satisfy the legal requirements that are set forth below in plain language:

Any funds that happen to remain in the Trust at the individual’s death must be used to reimburse the State for medical benefits provided over the individual’s lifetime.  This requirement to reimburse the State is commonly referred to as a payback provision.

What About Pooled Trusts in New Jersey

These trusts are also referred to as (d)(4)(C) trusts.  To establish a valid Pooled Trust, it must satisfy the legal requirements that are set forth below in plain language.

The Trust must be established and managed by a non-profit association.

The Trust must maintain separate accounts for each Beneficiary, but the funds are pooled for purposes of investment and management.

Each separate Trust account must be established solely for the benefit of an individual who is disabled as defined by law, and it may only be created by that individual, the individual’s parent, grandparent, legal guardian, or a Court.  There are no age restrictions or requirements.

The individual’s account must be established with assets belonging to that individual.

Any funds that remain in an individual’s account at that individual’s death may be retained by the Trust.  Any funds not retained by the Trust must be used to reimburse the State.  This may be referred to as a modified payback provision.