Planning for the care of a loved one with special needs or a disability can have its challenges. For example, how can you ensure they are cared for and have everything they need? How can you provide them with assets and avoid jeopardizing their government benefits?
You can help answer these questions and avoid some of these challenges by setting up a Special Needs Trust.
What is a Special Needs Trust?
A Special Needs Trust is a type of trust that assists with providing financial support to an individual with special needs. They are designed to help meet the beneficiary’s needs while not interfering with their government benefits.
The primary goal of Special Needs Trusts is to provide for or supplement the individual’s needs while not impacting government benefits like Medicaid or Supplemental Security Income (SSI). Government benefits have limits on income and assets; receiving financial assistance or gifts could impact or cancel the individual’s eligibility. This is where the Special Needs Trust could help.
Special Needs Trusts may make distributions for items not covered under their government benefits. These distributions are considered supplemental and do not generally replace or reduce the individual’s existing benefits.
Some examples of distributions include:
- Building accessibility modifications to the beneficiary’s home, such as a wheelchair ramp or chair lifts
- Service or support animals
- Specialized services like physical therapy or water therapy
- Certain medical, dental, or other health-related items not covered by Medicaid, including medicines
- Clothing, whether tailored to accommodate a specific disability or day-to-day use
- Other items for the beneficiary’s benefit, such as education, household furniture, or quality of life improvements
Types of Special Needs Trusts
Two common types of Special Needs Trusts are First-Party Special Needs Trusts and Third–Party Special Needs Trusts. Both types can provide additional assistance for individuals with special needs while maintaining their eligibility for government benefits.
Generally, both types have the same basic attributes:
- Designates the trust for the sole benefit of the individual living with a disability.
- Appoints a trustee to administer the trust and manage the funds
- Provides language stating that distributions are made at the sole discretion of the trustee
- Instructs the trustee to make distributions that supplement government benefits rather than using them for items and services that are already covered
Regardless of the type of Special Needs Trust, it is the trustee’s responsibility to ensure the funds are spent as intended and not used in a way that could jeopardize the beneficiary’s eligibility for government benefits.
First-Party Special Needs Trust
First-Party Special Needs Trusts are created with the asset of the beneficiary or those to which they are legally entitled. After the Special Needs Trust Fairness Act became law in 2016, mentally competent individuals, although legally disabled, became a “permissive settlor” of a Special Needs Trust.
Before this law passed, any First-Party Special Needs Trusts had to be established via a legal guardian of the property, a conservator, or by court order.
There is a requirement that, upon the beneficiary’s death, Medicaid must be reimbursed for any medical assistance paid on their behalf. The remainder of any funds left in trust may be distributed to any additional beneficiaries if there are any remaining assets.
If the trust has been exhausted and terminated, Medicaid has nothing to collect.
Third-Party Special Needs Trust
Third-Party Special Needs Trusts, as the name suggests, are created by someone else for the beneficiary’s benefit. For example, a woman might create a Third-Party Special Needs Trust for her disabled veteran brother to help him with his day-to-day needs.
Funds remaining at the beneficiary’s death may be passed on to other individuals. As the trust was created with assets that were not originally the beneficiary’s, there is no need for the trust to contain a Medicaid payback provision.
Who is Eligible for a Special Needs Trust?
Most often, Special Needs Trusts are established by family members of the beneficiary. However, any third party can establish a Special Needs Trust for the beneficiary’s benefit.
Regardless of who is the grantor of the trust, it is vital to seek the assistance of counsel when drafting the trust document. A poorly drafted trust could risk being «invaded» by the very government entities that provide their public benefits.
First-Party Special Needs Trusts are governed by the Omnibus Budget Reconciliation Act of 1993 (as well as the guidance materials Social Security Administration Program Operations Manual System), which include the following statutory requirements:
- The trust must be established by a permissible settlor (see above).
- The beneficiary of a First Party Special Needs Trust must be under the age of 65 upon its creation and funding.
- The trust must be irrevocable.
- Depending on the type of Special Needs Trust, the beneficiary supplementing government benefits with the trust must be considered «permanently and totally disabled» within the meaning of the SSA.
- The trust is for the sole benefit of the beneficiary.
- Upon the beneficiary’s death, medical assistance providers (Medicaid) will be reimbursed for any property remaining.
What are the Advantages of a Special Needs Trust?
If an individual with special needs inherits a large sum of money while on government benefits, it could prove problematic. It might jeopardize their benefits or disqualify them from receiving additional government assistance. Setting up a Special Needs Trust for the individual can help prevent this.
Some other key benefits of a Special Needs Trust include:
- Providing supplemental assistance for things that are needed but not covered under their government benefits
- Ensuring that assets are used responsibly and for the benefit of the recipient
- Helping protect the beneficiary’s assets should the beneficiary be involved in a lawsuit, as the funds are not subject to future creditors
- May help supplement the beneficiary’s needs even after your death, in the case of a Third-Party Special Needs Trust
What are the Disadvantages of a Special Needs Trust?
There are many things to consider when deciding whether to establish a Special Needs Trust for your loved one. Understanding and weighing all the pros and cons is crucial before utilizing any legal tool.
- Some Special Needs Trusts must have a Medicaid payback provision to be completed upon the beneficiary’s death
- The beneficiary must request any distributions from the trustee, which could result in a reduction in independence
- There may be a minimum amount required to establish the account
When drafting your trust, it is essential to work with an attorney knowledgeable about Special Needs Trusts and estate planning. Alliance Trust Company of Nevada works with many trusted and capable lawyers that can help fulfill your requirements and get you established with the right person for your situation.
This article is for informational purposes only and should not be taken as legal or tax advice. Each individual’s legal and tax situation is unique and should be reviewed by licensed professionals. Laws and regulations are subject to change, and Alliance cannot be held responsible for reliance on the information contained herein.