If you’re caring for a loved one with disabilities, ensuring their long-term financial security is likely one of your greatest concerns. How do you provide financial support without jeopardizing their eligibility for crucial government benefits? This is where Special Needs Trusts (SNTs) come into play.
Understanding Special Needs Trusts
A Special Needs Trust is a specialized legal arrangement designed to preserve a beneficiary’s eligibility for needs-based government benefits such as Medicaid and Supplemental Security Income (SSI). Since the beneficiary doesn’t own the assets in the trust, they can remain eligible for benefit programs that have asset limits.
These trusts are highly specialized and must conform to specific requirements. It’s important to note that earnings don’t grow tax-deferred, and the assets may be subject to taxation.
Why Consider a Special Needs Trust?
Government programs like Medicaid and SSI provide for the essentials, such as medical care, food, and shelter, but resources are limited and designed only to cover basic necessities. Special Needs Trusts are designed to supplement this foundational support, not replace it.
Families often set up an SNT to help the disabled individual cover the costs of care, live more comfortably, and explore their interests beyond what government benefits can provide. Without proper planning, an inheritance or financial gift could increase your loved one’s total asset value above program limits and harm their eligibility for assistance.
Types of Special Needs Trusts
There are three main types of Special Needs Trusts, each serving different needs:
First-Party Special Needs Trust
A first-party SNT, also referred to as a “self-settled” or “(d)(4)(A) trust,” is funded with assets or income that belong to the individual with a disability. Federal law requires that the beneficiary must be under age 65 when the trust is created and funded; the trust must be irrevocable and provide that Medicaid will be reimbursed upon the beneficiary’s death or upon termination of the trust; and the trust must be administered for the sole benefit of the beneficiary.
Typically, the funding comes from a personal injury settlement or inheritance the beneficiary receives directly.
Third-Party Special Needs Trust
Third-party special needs trusts are established and funded by a donor using assets that were never owned by the person with disabilities. In general, the trust assets may be used for most supplemental needs of the disabled beneficiary. Additionally, upon the death of the disabled beneficiary, the donor has control over the distribution of any remaining trust assets.
This trust has no provisions to pay back Medicaid upon the trust’s termination; rather, the person creating the trust decides how the trust estate is distributed when the beneficiary dies.
Pooled Special Needs Trust
Pooled special needs trusts are established and managed by a nonprofit organization, and the person with disabilities creates an account within the pooled special needs trust. Within the trust, the funds are pooled and the disabled beneficiary is entitled to a proportionate share of the assets.
These types of funds — also called community trusts — gather funds from multiple families, as well as other donors and community members, and use that money to serve each family. They name individual members as separate beneficiaries within the pooled trust, giving each their own account.
What Can a Special Needs Trust Pay For?
SNTs typically pay for things like education, recreation, counseling, transportation, and medical attention beyond the simple necessities of life.
Some specific examples of expenses that trust funds may cover include:
- Medical and dental expenses not covered by public benefits
- Special equipment like wheelchairs or specially-equipped vans
- Training and education
- Travel, which can include the cost of a companion in some cases
- Car payments, bus passes, or ride share fees
- Recreation and entertainment (summer camp, movies or social events, sports equipment)
- Computers and other electronic equipment
- Legal or guardianship expenses
What a Special Needs Trust Cannot Cover
Equally important to knowing what an SNT can be used for is understanding what trusts should avoid paying for to help preserve public benefits. Since Supplemental Security Income (SSI) is meant to cover basic living expenses, SNT funds used for those purposes may be considered “in-kind support and maintenance (ISM)” and may reduce SSI payments, which, in turn, may impact Medicaid benefits, housing subsidies, and more.
If you want to help your loved one cover costs related to housing (e.g., mortgage payments, property tax, rent, utilities), you may want to consider an ABLE Account for these expenses. Beneficiaries can have both an SNT and an ABLE Account.
Establishing a Special Needs Trust
Working with an attorney is often the first step in establishing an SNT. Professionals with experience in Elder Law, estate planning, and Special Needs Trusts have experience drafting language that can help ensure benefits are preserved and trust funds will be used in the way you, and your loved one, want them to be.
When establishing the trust, you will need to name a trustee – this is the person responsible for administering the trust, making decisions about whether to approve distributions of the funds, etc. This could be a family member or a professional trustee, or a Pooled Special Needs Trust.
You don’t have to be wealthy to establish and fund an SNT; these trusts can be funded with cash, securities or other resources. Life insurance policies (specifically a second-to-die or survivorship policy) often offer the most affordable option, enabling a family to fund an SNT without depleting funds needed for other household needs.
Important Considerations
Special needs trusts are complex. The language used in special needs trusts can vary greatly from one trust agreement to another and from state to state. It is essential for trustees and trust beneficiaries to understand the terms in the written trust agreement.
A legal professional experienced in special needs planning can ensure that the trust document will meet the needs of the trust beneficiary, the person who is funding the trust and the trustee who is administering the trust.
For more information about Special Needs Trusts, you can visit the Special Needs Alliance at https://www.specialneedsalliance.org/ or learn about disability eligibility criteria through the Social Security Administration at https://www.ssa.gov/disability/professionals/bluebook/.
Taking the Next Step
Planning for a loved one with disabilities requires careful consideration of their current and future needs. A properly established Special Needs Trust can provide peace of mind knowing your loved one will have financial support without losing essential government benefits.
Our law firm specializes in creating comprehensive Special Needs Trusts tailored to your family’s unique situation. We understand the complex interplay between these trusts and government benefit programs, ensuring your loved one receives maximum protection.
Don’t wait to secure your loved one’s financial future. Contact our office today to schedule a consultation with one of our experienced special needs planning attorneys. We’ll help you navigate this complex area of law and create a solution that provides for your loved one now and for years to come.
