Special Needs Trusts

If you have a loved one with special needs, you have to plan your estate carefully since leaving money or property directly to that person could jeopardize his or her government benefits, such as Supplemental Security Income (SSI), Social Security Disability (SSD) or Medicaid. The way around this problem is creating a special needs trust for the person you love who is medically or psychiatrically disabled. It is very important to have such a trust created with the help of a skilled estate planning attorney. Dunlap Bennett & Ludwig, a highly regarded law firm with offices throughout the country and around the world, can provide you with just such an attorney.

The Procedure of Creating a Special Needs Trust

Although your disabled loved one is permitted to retain his or her residence and motor vehicle without threatening government benefits, any extra money he or she possesses over a small amount ($2000 per individual) will put those benefits in jeopardy. With the assistance of your attorney, you will choose a trustee to manage the trust fund who will have full control over the resources you have bequeathed. Since your loved one will not have direct access to these gifted funds, he or she will retain full government benefits.

A special needs trust must be irrevocable in order to be effective. Also, the trust ends either at the time of the beneficiary’s death or when the trust funds have been exhausted. Obviously, when setting up your special needs trust, you should have complete faith that your trustee is reliable and will act with the proper mix of generosity and discretion.

How Special Needs Trust Funds Can Be Used

According to the regulations surrounding special needs trusts, the trustee cannot give money directly to your loved one, but can spend the trust assets on goods and services that will make your beneficiary happier and more comfortable. Typically, the funds in such trusts are used for the recipient’s home furnishings, education, vehicle or travel expenses, recreation, vacations, and to assist with out-of-pocket medical expenses.

How Special Needs Trust Funds Cannot Be Used

Special needs trust funds are intended to be used for luxuries rather than basic support. For this reason, the money in the trust should not be used for food or shelter. This means that the trustee is not permitted to use the trust fund to pay the recipient’s rent, mortgage, utility bills, or property taxes. Even so, because many of these payments will only reduce SSI or SSD benefits by a third, the trustee may decide, with the counsel of a knowledgeable attorney, that it is worth it to pay some of these expenses and take the hit of the one-third deduction.

Types of Special Needs Trusts

There are several types of special needs trust, each established to serve a distinct purpose.

Third-Party Trusts

This is the type of trust most typically used for the benefit of people with special needs. The trustee who has been chosen is allowed to use trust funds to provide personal services, luxury items, transportation, pet supplies and vacations for the beneficiary, but the disabled party never has direct access to trust funds.

Pooled Trusts

Pooled trust are useful in two particular situations: [1] if you don’t have a good candidate to act as trustee or [2] if you are leaving a relatively small sum and don’t want to set up an individual special needs trust. Pooled trusts are administered by nonprofit organizations that receive and invest funds from a number of families. While each beneficiary retains a separate account, the trustee appointed by the nonprofit spends money on behalf of each beneficiary.

While pooled trusts are available in many areas of the country, they vary in terms of the ways they operate and the fees they charge. If you are considering becoming involved in a pooled trust, also known as a community trust, it is best to confer with your attorney to make sure the one you choose is well-run and has a good track record.

First-Party Trusts

First-party trusts come into play when the special needs individual receives money through any of the following:

  • Personal injury or other lawsuit awards
  • Retirement funds
  • Divorce settlement
  • Life insurance policy
  • Inheritance

Knowing that his or her government benefits are threatened by this development, the disabled person, hopefully with sound legal advice, puts the newly acquired money into a first-party trust. This protects government benefits while allowing for certain otherwise unattainable pleasure purchases for the beneficiary.

It should be noted that a first-party trust for a minor must be:

  • Irrevocable
  • Created by a parent, guardian or the court if the beneficiary is a minor
  • Created for a beneficiary under the age of 65

Also, Medicaid will have to be reimbursed upon the beneficiary’s death or upon termination of a first-party trust, whichever occurs first.

Why You Should Have an Attorney Help You Create a Special Needs Trust

As you can see, there are legal complexities inherent in the creation of a special needs trust. For this reason, and because so much is at stake for your disabled loved one, it is imperative that you engage the services of an attorney experienced in all aspects of estate planning to assist in the process.