Understanding the Basics of Special Needs Trusts

If you wish to provide for a loved one who has a disability, it’s important to plan carefully. A special needs trust, sometimes also called supplemental needs or discretionary trust, can help ensure money is set aside for the care of your loved one after your passing — without jeopardizing their ability to receive Medicaid or Supplemental Security Income benefits. This type of trust can enrich the beneficiary’s life, allow them to live more comfortably, and give them the opportunity to explore their interests.

What is a Special Needs Trust?

A special needs trust is an estate planning vehicle that allows you to provide for a loved one with a disability without impacting their eligibility for government benefits. The funds in the trust can be used to pay for needs that are not covered by public benefits and can enhance the quality of life for your loved one.

There are three types of special needs trusts. These include:

• First-party special needs trusts — Also referred to as self-settled trusts, these types of special needs trusts are created with the beneficiary’s own money, such as proceeds from a personal injury settlement or an inheritance. With these types of trusts, the state must be reimbursed for any Medicaid benefits paid to the beneficiary before the rest of the funds are distributed to the remainder beneficiaries after the primary beneficiary’s passing.   
• Third-party special needs trusts — A third-party special needs trust is a legal arrangement that is funded with assets that belong to someone other than the beneficiary, such as a parent, grandparent, or other family member. These arrangements are usually put into place for estate planning purposes to ensure that the disabled individual is provided for after the grantor’s passing. Unlike with a first-party special needs trust, there is no requirement to use the remaining funds to reimburse Medicaid.
• Pooled special needs trusts — A pooled special needs trust is a trust that is established by a non-profit to manage funds for individuals with disabilities. It combines the assets from multiple beneficiaries into a larger pool, while maintaining a separate account for each beneficiary. This can reduce the administrative costs for each individual.

Each type of special needs trust has pros and cons. For instance, while pooled trusts offer less control, they are often more accessible to individuals who have smaller estates. A third-party trust can allow for the funds to be distributed to other family members after the beneficiary’s passing, but they cannot hold the funds that belong to the person with the disability. Although a first-party special needs trust provides flexibility, they are typically irrevocable — and cannot be changed once established. An experienced estate planning attorney can discuss the benefits and drawbacks of each to determine what structure is best to help you achieve your objectives. 

What Can a Special Needs Trust Be Used For?

A special needs trust can be used to pay for a wide variety of expenses that go beyond basic living costs. Notably, they cannot be used for food, rent, mortgage payments, and utilities. These trusts are “supplemental” — and pay for things that public benefits do not cover. Failure to adhere to the rules regarding special needs trusts can result in financial penalties and loss of benefits.

Specifically, some of the things a special needs trust can be used for include the following:

• Non-covered medical, dental, and vision costs
• Medical equipment and assistive devices
• Physical, occupational, and speech therapies
• Mental health counseling
• Education expenses
• Transportation
• Entertainment, hobbies, recreation, and travel
• Home renovations, repairs, and improvements

A special needs trust cannot make cash disbursements directly to the beneficiary. Rather, the trustee is required to pay for the expenses directly. The trustee has wide discretion over when the trust distributions are made, the amount distributed, and the purpose of the distribution.

How Can a Special Needs Trust Be Funded?

A special needs trust can be funded with a variety of sources. For example, cash, investments, or lawsuit settlement proceeds can be transferred into the trust. These types of trusts can also be funded with real estate or financial gifts. In addition, a life insurance policy or retirement account can name the trust as a beneficiary.

Remaining Compliant

The laws governing Medicaid and Supplemental Security Income (SSI) are constantly evolving. It’s essential to review the terms of a special needs trust on a regular basis to ensure compliance with the law and make any modifications necessary if regulations change. If the trust is irrevocable, court approval and the consent of all beneficiaries is typically needed to make any changes.

Contact an Experienced Estate Planning Attorney

If you would like to learn more about setting up a special needs trust for your loved one, a skillful attorney can best advise you. We invite you to contact Estate Planning & Elder Law Services today to learn more about how we can assist you with creating a special needs trust that will give you the peace of mind you need knowing that your loved one will be provided for. Our team of attorneys is dedicated to helping individuals and their families with a wide range of estate planning matters.