If you are the parent or the caregiver of a person with special needs, then at some point you will hear the term Special Needs Trust. When you are first introduced to this topic, you may have many questions. We are often asked, “What exactly is a Special Needs Trust? How does it work? Why is it important? Should I establish one?” The bottom line is that if it is designed correctly, the Special Needs Trust can be an important tool that will help you establish financial security for an individual with special needs both at the present time, and well into the future.
Simply put, the Special Needs Trust – which is established by placing funds and other assets under the control of a trustee – is a legal document which is designed solely for the financial protection of an individual with a disability. It is the only legal way for a beneficiary (the individual with a disability) to receive the benefit of unlimited extra income without sacrificing valuable state and federal benefits. It is of the utmost importance that the Special Needs Trust be written correctly. A trust which has been established without regard for the eligibility laws may disqualify a person with disabilities from government benefits, specifically from Supplemental Security Income (SSI) and Medicaid. (Note: In most states, Medicaid is automatic when a person with special needs qualifies for SSI.)
A short explanation to the answer that you are probably now asking yourself (how is that possible?) is this: SSI and Medicaid are needs-based government benefits. In order to qualify for these benefits, a person with a disability cannot assets totaling more than $2000 in their name. If the Special Needs Trust is completed correctly, it becomes its own entity. As such, any funds or assets which fall under the Special Needs Trust will not be considered an asset of either the grantor (the person who establishes the trust) or the beneficiary (the person with special needs). Therefore, the beneficiary will still qualify for SSI and Medicaid, as they will not have these funds or assets totaling more than $2000 in their name.
It is also important to remember that the funds in the special needs trust supplement but do not supplant government benefits. In other words, the special needs trust is designed to provide financial assistance for any care above and beyond what the government provides.
There are a number of ways in which the Special Needs Trust can be funded, either during the lifetime of the grantor, or upon their death. The trust allows family members to gift assets, leave inheritances or life insurances to a person with special needs without disqualifying him or her from government benefits.
There are three distinct types of Special Needs Trusts: third party/supplemental trusts, first party/pay-back or self-settled/d(4)(A) trusts, or pooled Special Needs Trusts.
Most Special Needs Trust are third party/supplemental special needs trust unless the assets were originally in the beneficiaries’ name or there are not enough assets to pay the fees to establish the third party special needs trust. Please see the definitions of each type of special needs trust below.
Third Party/Supplemental Trust
- This trust is created by someone other than the person with special needs for the benefit of the individual with disabilities.
- This trust can hold any kind of asset belonging to the donor, including a house, stocks & bonds, and other types of investments. It can also be the beneficiary of a life insurance policy.
- It does not contain the “pay back provision” because the assets were never originally in the beneficiary’s name. Therefore, any funds remaining in the trust can pass on to other family members, or charity, without having to be used to reimburse the government.
- This type of trust is the most common Special Needs Trust.
First Party/Pay-Back Self Settled/d(4)(a) Trusts
- If the person with special needs has more than $2000 in his/her name, typically because of excess savings, an inheritance, or an accident settlement, the government allows him/her to qualify for SSI as long as he/she places his/her assets in a first party/pay-back self-settled/d(4)(a) trust.
- This trust must be completed by someone else, i.e. parent, grandparent, court, but not the person with special needs (beneficiary). This is despite the fact that it is the assets of the beneficiary which will fund the trust.
- While the beneficiary is living, the funds in the trust are used for his/her benefit. When he/she dies, any assets remaining in the trust are used to reimburse the government for the cost of his/her medical care (Medicaid).
- Trust money is held and administered by a non-profit 501(c) and it works like the “pay-back” trust.
- When there is not a lot of money for a stand-alone Special Needs Trust, a non-profit establishes trusts that allow beneficiaries to pool their resources for investment purposes. Each beneficiary’s account is maintained separately for that beneficiary’s needs.
- When the beneficiary dies, the funds remaining in the account reimburse the government for the beneficiary’s public benefits received, and often a portion goes to the non-profit for management before the remainder passes to the beneficiary’s heirs.
As was mentioned earlier, it is very important to remember that families must work with an attorney who understands special needs planning. Special Needs Trusts are specific, and if written incorrectly they can actually disqualify an individual from government benefits. As well, if you feel that you may not have the funds to create this trust right now, you may also want to consider the fact that 92% of all Third Party/Supplemental Trusts are funded with life insurance benefits.
If you or a member of your family have any questions regarding a Special Needs Trust, or would like to begin the process of creating one for your child with special needs, we are more than happy to help. We also offer a free workshop titled “Navigating the Financial World of the Family with Special Needs”, during which we discuss this topic in more detail. If you would like us to host this workshop at your venue (we are willing to travel) please contact us.