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A special needs trust, also called a supplemental trust, is set up to offer financial support to a person with a disability without compromising his or her eligibility for crucial government benefits. Parents often establish special needs trusts to cater to the unique needs of a child with a disability. The assets in the trust are owned and managed by the trust, not the child. As such, it preserves the child’s eligibility for government assistance programs like Supplemental Security Income (SSI), Medicaid, or Medicare.
How Does a Special Needs Trust Work?
A special needs trust meets a specific percentage of a disabled individual’s financial needs that aren’t met by government assistance programs. The trust assets don’t affect the individual’s eligibility for government assistance, provided they aren’t used to cover specific food or shelter expenses. Money from this type of trust usually covers medical costs, transportation expenses, payments for caregivers, and other acceptable expenditures.
The person who sets up the trust appoints a trustee who is in charge of the trust. The duties of a trustee include everything from investing the trust funds, disbursing the proceeds to beneficiaries, paying taxes, to keeping the accounts as detailed as possible. Medicaid’s repayment rules might apply to disabled-individual-owned assets that are put into the trust. These rules, however, don’t apply to assets given by third parties like parents.
In a nutshell, a special needs trust is built around three key people who play different roles. They include:
- A grantor, also known as a settlor, who sets up the trust and funds it;
- A beneficiary, the individual with a disability, and
- A trustee, who controls the funds for the sole purpose of benefiting the beneficiary.
Types of Special Needs Trusts
Special needs trusts fall into three key categories: the first party, the third party, and the pooled trust. Under the three trusts, an individual with special needs is called the beneficiary. These trusts are a perfect choice for beneficiaries who are collecting SSI benefits and suddenly land a substantial amount of money, as they allow the beneficiary to continue collecting his or her benefits and still use his or her trust funds when a need arises.
First-Party Special Needs Trust
A first-party trust is established with assets that originally belong to a person with a disability, who also doubles as the ‘beneficiary.’ This kind of trust usually holds an inheritance or even a personal injury settlement. The beneficiary must be below 65 when this trust is set up. The money left in the trust upon the death of the beneficiary must first be used to repay Medicaid for services rendered to that person and then what remains can be dispensed to other beneficiaries.
A Third-Party Special Needs Trust
This trust is established with assets offered to the beneficiary by other people like parents, close friends, and relatives. A grantor can set up and fund this trust either during the grantor’s life or as part of his or her last will. Medicaid repayment requirements don’t apply to third-party special needs trusts. Consequently, the residual funds following the death of the beneficiary may be distributed to surviving beneficiaries.
Pooled Special Needs Trusts
These trusts are generally the best option for small estates or in cases where finding a trustee is an arduous task. They are often handled by nonprofit corporations that bring together sub-accounts belonging to different beneficiaries and administrate them as a single entity. These corporations rely on the expertise of social workers, financial professionals, and special needs attorneys to run these trusts. Upon the death of the beneficiary, some of the residual funds go to Medicaid to repay the services offered to the individual while the rest remains with the nonprofit corporation.
Common Reasons for Setting Up a Special Needs Trust
Setting Aside Assets for Supporting One or More Beneficiaries
Trust structures are designed to legally title and keep assets to support one or multiple beneficiaries. The same applies to special needs trusts, which are created to benefit a person with a disability. Special needs trusts can take care of a wide array of needs and the wording of the trust spells out how the grantor intends the funds to be utilized.
Appointing a Trustee
Designating a trustee to make critical investment decisions and supervise the disbursement of assets is one of the key benefits of establishing a special needs trust. If a beneficiary lacks the skills to handle the money on his or her own, the trustee will perform the important role of managing the assets and overseeing spending decisions. The trustee will also make sure that the grantor’s initial intentions are respected when it comes to using the assets in the trust.
Safeguarding Assets from Creditors or Offering Assets in Divorce
A special needs trust can protect individuals with disabilities who aren’t eligible for SSI or other government assistance payments. The trust structure can effectively protect assets if a lawsuit is filed against a beneficiary or if he or she experiences a divorce.
In the event of a divorce, a special needs trust may be included in the divorce agreement for two main reasons. The first is for the trust to receive the child support intended for a child with a disability. The second one is for the divorced couples to use it to amass assets set aside for the future support of a child with a disability.
Preserving a Disabled Person’s Eligibility for Government Assistance
Putting life insurance benefits and planned inheritance in a special needs trust can help grantors keep the disabled beneficiary protected, whether he or she was born with the disabling condition or developed it after an injury. Through the trust structures, a grantor can offer money that will enable a beneficiary to lead a quality life without compromising the beneficiary’s eligibility for government assistance programs or other support services.
The Bottom Line
Every person with a disability has his or her own unique needs. A special needs trust should, therefore, be established with those needs in mind. Families that have members with disabilities can identify the right special needs trust for their unique situation by working with a competent special needs attorney.