The introductory article to this Financial Planning Series stressed the importance of using professionals to navigate complex issues surrounding financial planning. One mistake can result in loss of benefits, loss of access to funds, higher taxation, and who knows what else. Toss in the reality of laws being in a continual state of change and one can see how easily a crucial mistake can be made.
This article will provide an overview of Special Needs Trusts.
Simply understanding the bones of Special Needs Trusts is still a lot to take in. Once, you feel confident with the information in this article, visit a variety of websites from special needs lawyers. Almost all of their websites will expand upon the basics. One of our favorite sites to use as a launching pad is Special Needs Answers.
Beneficiary - the special needs individual
Trustee - the person in charge of the trust
Assets - stuff that is worth money, including money
Fund - putting assets into the trust
Benefits - government programs such as Social Security and Medicaid
Medicaid Benefit Payback - when the special needs individual dies and Uncle Sam wants to use what is left in the trust to get all of his money back...ouch!
Why do you need to set up a Special Needs Trust?
Assets over $2000 disqualify eligibility for benefits. The government may view assets differently than you. Take a look at this link for their perspective.
Setting up a Special Needs Trust is incredibly important so your loved one can remain eligible for benefits while also having the money needed to cover expenses not paid for with benefits. Special Needs Trusts are a place to hold assets needed to provide quality of life without being denied benefits due to exceeding the $2000 cap.
What can a Special Needs Trust fund?
Special Needs Trusts are important because benefits only provide a limited amount for the basics of food, shelter, and medical. Supplemental items not covered by public benefits which improve the quality of life are funded via the Special Needs Trust (and ABLE account).
Depending on the state you reside these can include caregivers, vacations, home furnishings, out of pocket medical and dental expenses, education, recreation, vehicles, rehabilitation, electronics, etc. It is important to remember the money to pay for these services should go directly from the trust to the provider and never through the beneficiary as this is would be considered income.
What can a special needs trust NOT fund?
The trust can not be used for anything covered by benefits such as food, clothing, and shelter. Money also can not be distributed directly to the individual. Payments can not be distributed for purposes unassociated with the beneficiary. It is important to note that state laws vary so contact your attorney with questions.
Every Trust Has a Trustee
Every trust needs to have someone appointed who is in charge of the money in the trust. This person is called a trustee. While alive, parents often serve as the trustee.
Being a trustee is a big responsibility. One mistake and benefits can be lost for your special needs loved one. Do not assume just because Uncle John is good with money he can become the trustee without council and education on how government benefits work. Choose someone who is willing to take time to thoroughly learn and embrace the importance of the role. In addition to knowing how the system works, the trustee will also be responsible for investment and asset management, filing tax returns, and keeping records.
Last but certainly not least is staying connected with the needs and wants of the beneficiary so as to make the best quality of life choices with available funds.
If you do not have a trustee to choose from, many organizations and nonprofits offer the service.
Third Party Special Needs Trust
Third party trusts are funded with assets that never belonged to the beneficiary.
Often Third Party Trusts are set up by parents and relatives who fund the trust. There are many advantages to Third Party Trusts including ease of set up and fewer limitations and requirements.
Unlike, First Party Trusts, the Third Party Trust does not need to repay the government for Medicaid benefits utilized. This is a huge advantage for relatives who want to distribute funds to other family members.
If you know someone is going to leave an inheritance for your special needs loved one, consider asking them to set up a Third Party trust. If they do not want to go through the process, then make sure they know to leave assets to a First Party Trust which you will already have set up.
First Party Special Needs Trust
If there is a chance the special needs individual will be receiving assets from an inheritance or settlement then a First Party Trust should be set up. First party trust are funded with assets belonging to the beneficiary. Assets often come in the form of life insurance policies from parents or an inheritance. But as we have established, the special needs individual will lose benefits if owned outright. They must be put in the trust which is usually established by the parent. One disadvantage of a first-party trust is after the death of the beneficiary, assets left in the trust are used to pay back the government for previous Medicaid benefits.
First party trusts come in many forms such as Miller Trusts, (d)(4)A or (d)(4)(C). Each is subject to many federal and state rules designed to prevent applicants from sheltering assets in order to receive benefits. An attorney can guide you in a direction that makes the most sense for your situation.
Pooled Special Needs Trust
In a Pooled Special Needs Trust, assets are pooled with other parties and invested as one lump sum. The pooled funds are set up and managed by a nonprofit association. In other words, the nonprofit is the trustee. Each beneficiary has an individual account even though the funds are invested with other accounts.
After the beneficiary dies, funds are subject to Medicaid payback and typically are absorbed back into the pool.
Pooled trusts are a good option when it is not possible to open a first party trust and assets are few. Others like the idea of a pooled trust because their assets can help others.
Here is a list of pooled trusts listed by state.
If you plan to leave assets upon your death to fund a special needs trust of a loved one, then consider placing those assets in a Revocable Living Trust. After your death, the assets in the Living Trust can move into the Special Needs Trust immediately. If these assets are in a will and not a living trust then there will be a delay in distribution. This is called probate and the delay could easily be up to 2 years.
In addition to Living Trusts, there are a variety of other methods to avoid probate. Here is a link from NOLA with several helpful tips.
Here is a helpful and in-depth article from the American Bar Association on Living Trusts.
You can plan on spending at least $2000 to set up a Special Needs Trust. It is not cheap. However, there is too much at stake to make a mistake. A few thousand dollars now can save you tens of thousands or hundreds of thousands of dollars later.