A special needs trust is a specific type of trust fund that’s created to help a beneficiary with special needs but not jeopardize their eligibility for government benefit programs, like Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI) and Medicaid. KAKE’s recent article, “How a Special Needs Trust Works,” says that programs like SSDI and Medicaid can be vital supports for those dealing with disabilities or chronic illnesses.
These programs have income limits to ensure they’re serving those who need them the most. If you were to just give money to your beneficiary when you pass away, it could come in above this income limit.
A special needs trust works around this. That’s because the owner of the funds is technically the trust, not the beneficiary. You also name a trustee to be in charge of disbursing the funds in the trust. Therefore, while the beneficiary benefits from the trust, she doesn’t have control of its assets.
If you are creating a special needs trust for a beneficiary, you must do this before the beneficiary turns 65. And funds from the trust typically can’t be used to pay for food or shelter.
If you could benefit from a special needs trust, but you own the funds, you can create a first-party special needs trust in which you serve as both the beneficiary and the grantor. These can be complicated to draw up, and states have varying rules determining their validity. A first-party special needs trust has the money that belongs to its beneficiary.
With a third-party special needs trust, the trust holds funds that a beneficiary doesn’t directly own. These are generally used by grantors to allow the beneficiary to start getting money from the trust, even before their death. The funds never technically belong to the beneficiary, so they can’t be used for Medicaid payments. The trust can be used to save money for the beneficiary and future beneficiaries.
The third type of these trusts is the pooled special needs trust. Nonprofit organizations manage assets for a fee, and these organizations pool the funds of multiple trusts together and invest them. When it comes to payments, beneficiaries get an amount equal to their percentage of the pooled trust’s balance.
A special needs trust lets you write down what you wish your funds’ purpose to be, making it legally binding. Special needs trusts are irrevocable, so you can also protect your funds from creditors and lawsuits against the trust’s beneficiary. It lets you help your beneficiary deal with the expenses that come with illness or disability, without hampering their ability to get other assistance. Speak with an estate planning lawyer that specializes in special needs trusts if you are considering this type of trust to care for a disabled loved one.
Reference: KAKE (September 30, 2019) “How a Special Needs Trust Works”