An estate planning strategy to carefully consider is a special needs trust. This article offers an overview of a special needs trust and the pros and cons of setting one up.
What Is a Special Needs Trust?
A special needs trust provides for a disabled, chronically ill, or injured beneficiary who relies on government assistance. The trust’s primary purpose is to preserve eligibility for Medicaid and Supplemental Security Income (SSI) benefits while providing funds from the trust. In other words, the trust will supplement your beneficiary’s government benefits but not replace them.
Owning a home and a car does not affect eligibility for Medicaid or SSI. However, leaving a monetary gift to your loved one could disqualify them from getting these government benefits.
You can avoid this problem by placing money or property in a special needs trust. That’s because the assets in the trust are managed by a trustee and are not considered part of your loved one’s assets.
Special needs trust funds are typically used to pay for personal caregivers, medical and dental expenses, transportation, education, recreation, and physical rehabilitation.
How Does a Special Needs Trust Work?
Just as with any trust, a grantor creates a special needs trust and selects a trustee to manage it and oversee the disbursement of its assets. The trustee has the fiduciary responsibility to act in the best interest of the beneficiary.
There are two main structures for a special needs trust—an individual trust and a pooled special needs trust.
Pooled trusts (also called community trusts) are run by non-profit organizations that “pool” and invest funds from a group of families. The non-profit spends money on behalf of each beneficiary.
In this article, we will focus on individual trusts, which fall into two categories: self-funded or first-party special needs trusts and third-party special needs trusts.
Self-funded special needs trusts allow disabled individuals to place their own money into a trust. The funds might include an inheritance, life insurance proceeds, or a personal injury settlement. These trusts are meant to hold assets belonging to the beneficiary before the trust was created.
As the name implies, a third-party special needs trust is funded by a third party, such as a relative or close friend.
What Qualifies as a Disability for a Special Needs Trust?
You may wonder what qualifies as a disability for this type of estate planning. For example, can you create a special needs trust to help a loved one with a mental illness or addiction problem?
The answer is that a grantor must be careful using a special needs trust for this purpose. The trust assets may not be able to be used for all the personal needs in this situation. A violation could mean that the beneficiary would not receive some of the public benefits allowed for mental illness and addiction issues.
Here are some other rules and regulations that apply to special needs trusts:
- The trust must be created before the beneficiary turns 65.
- The trust ends upon the beneficiary’s death, and the remaining assets are distributed to the other beneficiaries or the beneficiary’s estate.
- The trust money cannot be used for food or housing expenses.
- Special needs trusts are irrevocable. Creditors or winners of a lawsuit cannot access trust funds that are designated for the beneficiary.
Advantages of a Special Needs Trust
As stated above, the primary advantage of a special needs trust is that it can help pay for expenses while keeping the beneficiary eligible for government assistance. Here are two other key benefits of this estate planning tool:
- The funds in a special needs trust are tax-deductible.
- The money is used only for the care of the beneficiary. In other words, the trust funds are not available to creditors or for paying judgments.
Disadvantages of a Special Needs Trust
The annual fees and cost of setting up a special needs trust can be high for many families. Here are some other possible disadvantages to this structure.
- The beneficiary lacks control of the funds. The trustee is in charge of the trust, and the person the trust is created to benefit has little say in how their own money is spent. The beneficiary needs to request funds from the trustee, and the trustee has full discretion as to whether or not to honor the request. Sometimes, this lack of independence can be frustrating for the beneficiary.
- The trust must pay back Medicaid. Upon the beneficiary’s death, the trust must reimburse Medicaid on behalf of the beneficiary. This step can often wipe out what remains in the trust.
Who Should be the Trustee of a Special Needs Trust?
Selecting the right person for your trustee is an important decision for any trust. However, it may be even more important for a special needs trust.
In addition to the traditional responsibilities of a trustee—investment, distribution, reporting, and administration—a trustee of a special needs trust must ensure that all disbursements benefit the beneficiary and that disbursements are payable to a third party.
Also, when the beneficiary passes away, the trust must repay the state’s Medicare division before any distributions go to the remaining beneficiaries.
The trustee also should know something about the beneficiary’s needs and how those needs might change over time. Some families choose to have co-trustees for this type of trust—a professional and a family member. If you decide to go this route, make sure your trust document clearly spells out the roles and responsibilities of each trustee.
You don’t necessarily need to hire an attorney to create a special needs trust. However, if you don’t use a legal service, you’ll want to research state and federal laws to ensure you are in full compliance.
Planning for your child’s financial future can be challenging under any circumstances. When that loved one has an illness or disability, the challenge is only compounded.
Pros & Cons of a Special Needs Trust
ncG1vNJzZmivp6x7q7DSrqermV6YvK57y56emqSemsS0e8isZJplo6WypLXApWSnnZWZwG7A0a6qrWWinrSpwIyfpqtlqaTCboORaWpxa2dk