Special Needs Trust

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If the parent or guardian of a disabled person dies, but leaves the disabled person assets, like gifts or inheritances, receiving those assets can cause the disabled person to lose his or her Medicaid or Social Security Benefits (SSI). This is where a special needs trust can help.

Federal and state laws allow parents and family members to set up what are called special needs trusts to hold gifts and inheritances that have been bequeathed to a disabled person. When these assets are held in a trust for the benefit of a disabled person, Medicaid and SSI will not consider the assets when deciding if the disabled person qualifies for those need-based government benefits.

Furthermore, the law allows the trust to pay for items that will enhance the disabled person's standard of living, such as:

  • Clothes;
  • Computer;
  • Cell phones;
  • Televisions;
  • Therapies that Medicaid won't cover;
  • Trips;
  • Cars;
  • Etc.

A special needs trust also allows the person setting up the trust (usually a parent or guardian) to dictate who gets the remaining assets after the disabled person has passed away.

What is a Special Needs Trust?

A special needs trust is a specialized form of trust that allows a disabled person to qualify for need-based public benefits like Medicaid and SSI. At the same time, this kind of trust permits the disabled individual to retain assets that would have otherwise made him or her over the asset limits to qualify for some forms of public benefits like Medicaid and SSI.

A special needs trust can make the difference between a trust beneficiary who can enjoy a private room in a nursing facility, take a trip to visit family, hire a trusted family caregiver, purchase a car, take educational courses, and a disabled person who cannot afford these things.

Thus, a special needs trust has two fundamental purposes:

  1. To enable the disabled person to receive gifts and inheritances from others; and
  2. To improve the quality of his or her life by supplementing their basic needs.

Characteristics of a Special Needs Trust

The principle behind a special needs trust is to make the trust assets unavailable to the trust beneficiary. In other words, the trust beneficiary must have no power over or access to the trust assets for his or her own support and maintenance.

Rather, authority rests with the trustee who has absolute and sole discretion in making distribution decisions. By doing so, the trust assets do not count against the beneficiary's financial eligibility for public benefits like Medicaid or SSI.

Another important and related characteristic of a special needs trust is the fact that it is an irrevocable trust. After the trust has been created and funded, the assets cannot be returned to the creator, whether the creator is the trust beneficiary or anyone else.

Moreover, distributions from the trust must be for the beneficiary's sole benefit. The federal law that allows a special needs trust to enjoy the special status of being an exempt asset requires that it be created for the benefit of the trust beneficiary only, and only during his or her lifetime. Thus, a special needs trust will not work as a tool for transferring wealth to future generations.

Finally, the beneficiary of the trust must have a disability and be able to show proof of that disability. This proof can be formal as determined by SSI and Medicaid or informal as per a physician's letter.

Types of Special Needs Trusts

There are two basic types of special needs trusts:

  1. First-party Trusts; and
  2. Third-party Trusts

A first-party trust is funded with the trust beneficiary's own assets and is also referred to as self-settled trusts or pooled trusts. A first-party trust can be created by the beneficiary him or herself, his or her agent, a representative payee, or by court order.

Typical assets used to fund a first-party trust are:

  • Inheritances
  • Personal Injury settlements
  • Maintenance payment in a divorce settlement
  • A workers compensation award
  • Back payment of public benefits
  • Assets owned by the beneficiary
  • Assigned income, such as from a public or state pension fund

A third-party trust is one that is funded by anyone other than the trust beneficiary. Assets that belong to the beneficiary cannot be put into a third party trust, because this would trigger a Medicaid payback after the beneficiary has passed away.

A third-party trust can be created by any third-party, but are typically created by a parent or grandparent, or an agent for a third party––usually a guardian or agent under a durable power of attorney.

Common examples of third-party trusts include:

  • A special needs trust which is funded through the last will and testament of a parent or grandparent for the benefit of a disabled child or grandchild.
  • A special needs trust created for the benefit of a disabled adult child by a parent during his or her lifetime, to enhance the disabled adult child's standard of living without endangering their eligibility for public benefits.

Third-party trusts are more flexible than first-party trusts and can be created as part of an overall estate plan. For example, a parent’s last will and testament can create a testamentary trust and authorize the trustee to create and fund a special needs trust for the benefit of a disabled child.

Similarly, a parent can create a third-party trust now, include the proper language to fund the trust in his or her Will or trust, and then the trust will be funded at the death of the creator.

Other advantages of third-party trusts are:

  1. More relaxed rules regarding who can benefit from the trust
  2. Certain tax benefits for the trust creator
  3. Options for the beneficiary to make annual gifts

Working with an Experienced Estate Planning Attorney

Special needs trusts can be complicated because they must be administered by the letter of the law. This is where an experienced estate planning attorney can help.

An experienced estate planning attorney will know how to administer a special needs trust for a person with special needs so that the trust stays in compliance with Medicaid and SSI.

For more information or for help with setting up and administering a special needs trust, contact an experienced estate planning attorney today for a free consultation.

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