Understanding the Role of Special Needs Trusts
As a parent of a disabled child, one of your primary concerns is ensuring your child’s financial security and well-being long after you’re gone. But you may also face a complex dilemma: how can you leave an inheritance to your child without jeopardizing their eligibility for vital government benefits such as Supplemental Security Income (SSI) and Medicaid? The experienced attorneys at Gerhard & Gerhard, P.C. can guide you through this process by helping you establish a Special Needs Trust (SNT), a powerful legal tool designed to bridge this gap.
What Is a Special Needs Trust?
A Special Needs Trust is a legal arrangement that allows parents or other family members to set aside assets for the benefit of a disabled individual while preserving their access to government benefits. These trusts are carefully structured to supplement—not replace—the financial support provided by programs like SSI and Medicaid. Rather than giving assets directly to the disabled individual, the trust holds and manages those assets, ensuring compliance with the strict eligibility rules that govern these benefits.
Why Direct Inheritances Can Be Problematic
Government assistance programs for individuals with disabilities often have strict financial eligibility requirements. For example:
- SSI: The individual must have less than $2,000 in countable assets.
- Medicaid: Asset limits vary by state but are similarly restrictive.
A well-intentioned direct inheritance could inadvertently disqualify your child from receiving these essential benefits. By transferring the inheritance into a Special Needs Trust, the assets are excluded from your child’s countable resources, safeguarding their eligibility.
Types of Special Needs Trusts
There are two main types of Special Needs Trusts that parents can consider:
1. Third-Party Special Needs Trust
This type of trust is established by a parent or another third party and is funded with assets that never belonged to the disabled individual. Common funding sources include life insurance policies, savings, or investment portfolios. A third-party SNT is usually the preferred choice for parents planning their estate, as it allows for greater flexibility in how funds can be used.
2. First-Party Special Needs Trust
Also known as a “self-settled trust,” this option is funded with assets that belong to the disabled individual, such as a settlement or inheritance they received directly. First-party SNTs often require court approval and must include a Medicaid payback provision, meaning any remaining funds after the beneficiary’s death are used to reimburse Medicaid.
How a Special Needs Trust Works
When you establish a Special Needs Trust, you’ll designate a trustee—a person or entity responsible for managing the trust assets and making distributions for your child’s benefit. The trustee’s role is critical because distributions must comply with government rules to avoid disqualification from benefits.
Permitted Uses of Trust Funds
Trust funds can be used to enhance the disabled individual’s quality of life by covering expenses not typically provided by SSI or Medicaid, such as:
- Medical care not covered by insurance
- Education and vocational training
- Recreational activities
- Transportation, such as a vehicle adapted for disabilities
- Personal care attendants or companions
Prohibited Uses of Trust Funds
The trustee must avoid using the trust assets for basic needs already covered by SSI, such as food and shelter, as this could lead to a reduction in benefits. Sometimes the trust is discretionary, and does permit the of funds for basic living expenses that would disqualify the beneficiary from benefits, or reduce benefits, if the trustee determines that it is in the best interest of the beneficiary to have benefits reduced. For example, SSI can be reduced if the trust is used to pay shelter expenses, such as rent, but the trustee might conclude that it is worth seeing the beneficiary’s Supplemental Security Income (SSI) reduced by paying rent. Having this housing expense paid by the trust, in this example, is likely more valuable to the beneficiary than the SSI income. If the trust prohibits paying rent and shelter expenses, our lawyers may be able to secure court approval to have the trust modified.
Steps to Establish a Special Needs Trust
Creating a Special Needs Trust requires careful planning and the assistance of an experienced estate planning attorney. Here’s an overview of the process:
1. Consult with an Attorney
Work with an estate planning attorney who specializes in Special Needs Trusts to ensure the trust is compliant with federal and state laws.
2. Choose a Trustee
Select a trustworthy individual or institution to manage the trust. Consider their financial acumen and understanding of the beneficiary’s needs.
3. Fund the Trust
Decide how to fund the trust, whether through life insurance, savings, investments, or other assets. Be mindful of the timing and method of transferring assets to avoid any unintended consequences.
4. Draft the Trust Document
The attorney will draft the trust document, specifying how funds are to be managed and distributed. This document should also address contingencies, such as the appointment of a successor trustee, and who is to inherit money left over in the trust after the death of the primary beneficiary.
The Role of a Special Needs Trust Lawyer
A knowledgeable attorney is indispensable in this process, as they provide:
- Compliance: Ensuring the trust adheres to SSI and Medicaid rules.
- Customization: Tailoring the trust to your child’s unique needs.
- Guidance: Advising trustees on their fiduciary duties and providing ongoing support.
Peace of Mind for the Future
Establishing a Special Needs Trust is more than just a financial strategy—it’s a way to secure your child’s future and preserve their quality of life. By planning proactively, you can ensure your child continues to receive essential government benefits while enjoying the additional support and opportunities that their inheritance can provide. Funds remaining in the trust upon the death of your beneficiary can be passed on to individuals or charities of your choosing.
If you’re in the process of estate planning, consult with an experienced attorney to explore how a Special Needs Trust can benefit your family. It’s a meaningful investment in your disabled child’s well-being—both today and tomorrow.
If you’re in the process of estate planning, consult with an experienced attorney to explore how a Special Needs Trust can benefit your family. It’s a meaningful investment in your disabled child’s well-being—both today and tomorrow.
Ready to secure your child’s future?
The attorneys at Gerhard & Gerhard, P.C. specialize in creating tailored estate planning solutions, including Special Needs Trusts. Contact them today to schedule a consultation and get started. Click here to contact us and schedule a consultation today. Let’s protect what matters most.
