For loved ones with disabilities or a debilitating and chronic illness, programs like Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI) and Medicaid allow them to get the services and care they need. However, these programs have income limits to ensure that those who need these funds the most receive them.
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 these programs, explains KAKE’s recent article, “How a Special Needs Trust Works.”
If a family member were to leave money to an individual who is receiving help from these programs, it could put their income above the income limit, and they would lose the government funding.
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 a person could benefit from a special needs trust, but they themselves 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.
Through the use of a special needs trust, you can help your loved one to have funds to deal with the expenses that come with a disability or illness, without risking their ability to receive government benefits. The trust can also be very specific about how the money is to be used.
A special needs trust lets you help your beneficiary deal with the expenses that come with illness or disability, without hampering their ability to get other assistance. An attorney whose practice focuses on special needs trusts will explain that these trusts are irrevocable, which means that creditors cannot attach the funds.
Reference: KAKE (September 30, 2019) “How a Special Needs Trust Works”