What is a Trust?
A trust is a lawful setup in which an individual or company takes care of another person’s properties. The trust’s possessions can be utilized to pay for the other person’s expenses. The person whose expenses are paid for by a trust is called the “beneficiary” and the person or organization in charge of taking care of the property is the “trustee.” A lot of different types of assets can be placed in a trust. Money, stocks, land, and bonds may all be managed can be put into a trust.
Special Needs Trust Defined
If you have a loved one who has special needs is seen to be dependent on others their entire lives and maybe mentally unable to manage his or her own finances, you want to be assured that he or she will be taken care of when you are no longer around to look after him or her.
This is where a beneficial estate planning tool is known as a Special Needs Trust (SNT), otherwise referred to as Supplemental Needs Trusts, comes into play. Special needs trusts are an excellent option to ensure your loved one with special needs is taken care of in the event of your passing. Special needs trusts (SNTs) are a class of trusts made specifically for the benefit of those with physical and/or mental disabilities. SNTs may also be set up to manage the proceeds from a legal settlement on your behalf if you became disabled after a serious car accident, medical malpractice incident, or another injury.
Similar to regular trusts, assets are also secured for the beneficiary in SNTs. All you need to do is to choose the best to serve as a trustee. Under the direction of the trustor (the person who created the trust) and their discretion, the trustee will be in charge of distributing the assets and of helping the beneficiary manage their inheritance by determining how, when and on what to spend their money. SNTs are tailor-made to address the specific needs, lifestyle and future of the differently-abled or mentally ill beneficiaries.
Importance of Special Needs Trust
SNTs are not just useful in protecting assets from being irresponsibly spent, but can also help protect the beneficiary’s ability to receive Supplemental Security Income (SSI), Medicaid benefits, and Section 8. Bear in mind that owning property, such as a home, car, or other personal items, does not affect eligibility for SSI or Medicaid but other investments such as cash in a bank account will disqualify someone from maintaining eligibility to receive public benefits. As such, instead of leaving property directly to the beneficiary, the assets are left to the trust. A trustee has discretion on the management of the trust, including how the money will be spent on the beneficiary’s benefit. To elaborate, when the beneficiary needs to pay a provider for something other than food or shelter, the trustee will pay the money from the trust directly to the provider. Only the trustee is authorized to handle the money from the trust. Usually, the funds are used for personal care, vacations, home improvements, out-of-pocket medical and dental expenses, vehicles, among other expenditures.
Choosing the right trustee for a special needs trust is extremely important and the trustee must be someone you are certain will act in the beneficiary’s best interest after your death. Usually, a trusted family member who knows the beneficiary and his/her needs take on this role. However, if your situation doesn’t allow for this, there are professional trust companies that specialize in managing special needs trusts and you could designate one of these companies as trustees.
Because the property is left to the trust, and the beneficiary does not have control over the assets, the beneficiary’s eligibility status for public benefits will not be affected. Essentially, your trust can have more assets in it than the resource limits for benefits programs usually allow. In effect, this allows a more secure financial situation for the beneficiary without losing the benefits.
It is important to find a reliable person to set up the Special Needs Trust correctly. Otherwise, there is a risk of losing public benefits.
Types of Special Needs Trusts
Generally, the point is to maintain the eligibility in public benefits of a person with special needs, because one of the important features of a special needs trust is that the assets in the trust will not be counted toward asset thresholds contained in government programs such as Supplemental Security Income (SSI) and Medicaid. Special needs trusts may also be utilized to create a fund meant to supplement the services and/or care not provided by means-tested programs. Means-tested benefits usually have an income and asset limit to be met in order to become and remain eligible and this is where solid advice from an estate planning lawyer comes in handy.
Special needs trusts may come across as a simple concept. However, getting a suitable plan and putting this plan to action may be a tad complex. Complications arise from the variety of Medicaid and other public assistance programs available and the rules of eligibility followed by each program. Furthermore, the circumstances and care requirements for people with disabilities, as well as the financial capacity of their families may change over time. At the same time, the laws governing eligibility and the benefits for persons with disabilities also evolve. As such, it is in your and your loved one’s best interest that you seek legal counsel from attorneys specializing in estate planning to come up with an effective special needs plan.
There are two types of Special Needs Trusts (SNTs), commonly designated as first-party and third-party SNTs. It is important to determine which type of SNT you have or need. This depends upon whose property is funding the SNT. If the property funding the SNT originates with the SNT beneficiary, then it is a first-party SNT. However, if the property funding the SNT always belonged to someone other than the SNT beneficiary, then it must be drafted as a third-party SNT. They each have their advantages and disadvantages, and the right type for you depends on your specific circumstances.
- First Party Special Needs Trusts
- Often called Medicaid Payback Trusts
- If you have acquired your own assets, inherited assets, or gotten assets from a court settlement. Therefore, making you the sole owner of the money.
- Also used when the person with a disability inherits money or property outright or receives a court settlement.
- Also useful when a person without a prior disability owns assets in his or her name, later becomes disabled, and thereafter needs to qualify for public benefits that have an income or asset limitation.
- Can be set up by you, or by your parent, grandparent, legal guardian, or the court.
- Must specify that after the beneficiary’s death, any money left in the SNT will be used to pay back the state for the amount of money it spent on Medicaid after the trust was set up.
- Only after this Medicaid payback may any leftover money be distributed to other remaining beneficiaries.
- Qualifications of the Beneficiary:
- Must be under 65 years old
- Must have a disability that meets Social Security’s standards.
- Third Party Special Needs Trusts
- Commonly used by persons planning in advance for a loved one with special needs.
- Usually established by the parents of an individual with disabilities or special needs.
- May also be established by you, a grandparent, a sibling, legal guardian, or the court
- Not required to use the remaining assets to reimburse any state(s) for the Medicaid benefits received by the beneficiary during his or her lifetime.
- Can be included in a Last Will and Testament, established within an inter vivos trust that is designed to avoid probate (“Living Trust”), or drafted as a stand-alone SNT.
- Usually funded upon the death of the beneficiary’s parents or the other individual(s) who established the SNT.
Setting up a Special Needs Trust? Talk to an estate planning attorney for professional advice.
Trusts are complex and the nitty-gritty can be daunting to some people. Talking to an estate planning lawyer will help in understanding the ins and outs of estate planning, including setting up trust funds. Because there are different types of trusts and even more variations on special needs trust, it is crucial that you plan and create the one that is right for you or your loved ones. Working with an experienced special needs planning attorney early in the litigation, settlement or probate process can relieve you of your anxiety about the process and their benefits and set reasonable expectations after the matter is resolved.