When you have a loved one who has special needs, one concern you have is what happens to them if you are no longer there to provide care, and financial support. While many disabled individuals are eligible for government benefits, these benefits are means tested; this means you cannot simply leave money to your loved one without putting those benefits at risk. This is where a special needs trust may provide you with the peace of mind that your loved one will continue to be financially stable.
Types of Special Needs Trusts
It is important to understand the use of a special needs trust is to ensure any assets you wish to leave to your loved one is not denying them the benefits of programs like Supplemental Security Income, or medical care through Medicaid. There are three primary types of special needs trusts which you may elect to use; they are:
- First Party Trust – This type of trust is set up by a loved one, a parent, grandparent, or legal guardian. The funds for this trust are generally funds from an inheritance, income the disabled person has earned, or in some cases, funds awarded as part of a personal injury lawsuit. These trusts contain a provision for payback; which means any government benefits the special needs person receives while alive must be repaid. If there are remaining assets after payback, assets are distributed to the heirs, or the closest living relative of the special needs person, typically, siblings.
- Third Party Trust – These trusts are comprised of assets which are left for the benefit of the special needs person by a family member; parent, grandparent, or legal guardian. The trust has no payback provision and has no impact on government benefits provided it is maintained properly, and the funds are distributed appropriately. Just like a first party trust, upon the death of the beneficiary, the assets are distributed to heirs; children, or closest living relative.
- Pooled Trust – These trusts are generally managed by a nonprofit organization. This type of trust agreement transfers assets, in the form of cash, or physical assets, to the organization. The assets are combined with assets belonging to other disabled beneficiaries and managed by the organization. Each beneficiary has a subaccount within the trust, and the nonprofit assigns a trustee to the beneficiary.
Preserving Benefits Received
When establishing a special needs trust, it is imperative to understand how the funds, and assets may be used for the beneficiary. A trustee cannot distribute funds directly to the beneficiary; if they do, it could have an impact on any government benefits that are being received. Instead, the trustee would have to make distributions payable to specific parties for the expenses of the beneficiary. For example, a beneficiary who is returning to school, the trustee would make checks payable directly to the school. Paying for items the beneficiary is not able to afford using government benefits is acceptable, provided the funds are not paid directly to the beneficiary.
Identifying the Trustee of a Special Needs Trust
A trustee’s obligation under a special needs trust is important; this person has a duty and responsibility to make investment decisions, and distribution decisions on behalf of the special needs person. The trustee has an obligation to ensure when distributing funds there will be no negative financial impact to the beneficiary. In addition to the financial matters, which may be defined by the trust document, there may be other roles assigned to the trustee. One of the additional roles is to serve as an advocate; while a parent, or legal guardian is alive, they advocate on behalf of their loved ones, upon their death, the trustee of a special needs trust may be asked to accept that role. Finally, the trustee may also be willing to have the books, and assets of the trust reviewed from time to time. Typically, a special needs trust should have a mechanism for reviewing all investment decisions, and distributions from the trust on at least an annual basis.
At West, Longenbaugh and Zickerman, our estate planning lawyers are here to help you identify the right trust to help with all your needs. We understand the importance of including specific language in the trust document ensuring your loved one’s benefits are not negatively impacted; and we can help ensure the language contained in the trust agreement is designed to ensure the trustee acts in the best interest of your loved one.