If someone you care about has special needs, a special needs trust will help provide support for that person over the long term. Trusts are a legal arrangement managed by a trustee – either a family member, a financial institution or a legal administrator called a fiduciary. The trustee manages the trust, the assets it contains, and explains how it will be used for the beneficiary. When you leave money through a special needs trust, you won’t jeopardize the person’s eligibility to receive benefits.
Instead, a special needs trust will protect the beneficiary’s benefit eligibility, whether the person is mentally disabled, chronically ill, or dependent upon social security income. It preserves eligibility for Medicaid as well as Supplemental Social Security Income because the beneficiary doesn’t own the trust’s assets. Essentially, it will supplement rather than replace government benefits.
How to Know if You Need to Set Up a Special Needs Trust – and When
Special needs trusts can be set up for any adult unable to care for themselves, whether physically or mentally. It can protect against funds being lost or mishandled as well as inheritance. Financial abuse is unfortunately common and can be far more easily prevented with assets held in trust.
A trust can be put into effect anytime through an adult’s 65th birthday.
Remember, because the money doesn’t go directly to the person, government program eligibility, such as social security income, isn’t restricted.
How Special Needs Trust Funds are to be Used
Funds from a special needs trust do not go directly to the individual but instead to the trust, as noted, so government program eligibility has no restrictions. But within the trust there are restrictions about how money can be used. It cannot, for example, be used to pay food or housing costs that would be typically covered either through SSI or a beneficiary’s earnings. Instead, it is to be used for:
Expenses for education
Expenses for medical or dental procedures outside of or additional to government-provided care
Expenses for automobiles or other transportation
Furnishings or technology like computers for the home
Expenses for travel
Pet care expenses including food and veterinary care
Cell phone, internet, or cleaning services
Creating the Special Needs Trust Document
Whether you choose to use a lawyer, financial advisor, or do it yourself, creating a trust document must indicate:
The person setting up the trust, or grantor
The person or persons who manages the trust, or trustee
The beneficiary of the trust – the mentally disabled or chronically ill child or adult it is set up to benefit
Note that a trust will take effect once it is signed and notarized; once the trust’s IRS tax identification number is established, a bank account should be opened with at least a minimal deposit amount. You can fund the rest of the trust through estate planning such as a will, living trust, or property ownership.
The trust can hold everything from real estate to stocks, bonds, businesses, and valuable belongings such as jewelry, automobiles or art. Special needs trusts typically give the trustee authority to sell items such as cars or property as necessary.
Any person can contribute to a special needs trust, although most are created in the first place by parents for their children.
Remember, it’s important to name the trustee for a special needs trust on a designation form that controls what will happen to items such as bank accounts, retirement plans, bonds, or stocks held by the trust.
How a Trustee Administers a Special Needs Trust
Once the funded trust is established, the trustee’s work is crucial to support the mentally disabled or chronically ill person it supports. The trustee must use the trust funds in a way that does not jeopardize government benefits; pay taxes on the trust, keep records, and properly invest the property of the trust – as well as being sure to keep up with the needs of the beneficiary.
Anyone can serve as a trustee that is over 18. The trustee does not need to be a professional fiduciary. The role can be filled by a parent, relative, friend, or professional such as a lawyer or accountant.
Do you need a Fiduciary for a Special Needs Trust?
Whether or not you need a fiduciary is up to you. A fiduciary, who has a legal or ethical trust relationship with all the parties involved with the trust basically serves in a trustee position, managing the daily operations of the trust, and being sure to maintain the eligibility of the beneficiary for government programs.
Having a professional fiduciary will benefit the special needs trust in that experience with money management, investing, and government benefits are all extremely helpful. An additional advantage is eliminating the emotional strain of handling trust distributions for family or friends.
Preserving Medicaid and Supplemental Social Security Income
As discussed, preserving government benefits such as Medicaid and Social Security income for a mentally disabled or chronically ill person is best handled through the establishment of the special needs trust. The trustee can use the trust to supplement the beneficiary’s benefits without having to replace them, covering needed additional costs for everything from dental expenses to caregivers and transportation.
You do need to notify Social Security and Medicaid about the trust, of course. Any change to a beneficiary’s financial situation has to be reported to these agencies no more than ten days after the end of the month when such a change took place. Some Medicaid offices may have an even shorter reporting requirement of ten days following a change.
There are two basic types of special needs trusts:
Third party special needs trust – drafted for a beneficiary receiving government assistance, and sourced by someone other than a beneficiary
First party special needs trust – due to personal injury settlement, life insurance, or other types of assets owned by the beneficiary
Remember, the purpose of both kinds of special needs trusts is to allow the beneficiary to receive government assistance benefits while allowing the trustee of a special needs trust to provide additional funds for the beneficiary. The individual or attorney who created the special needs trust should include a cover letter to each government agency explaining that the trust and its assets are part of a special needs trust. They should also reference the beneficiary’s social security number and Medicaid number as appropriate, to make sure the information is correctly saved in the beneficiary’s government files. You should keep a copy of this cover letter and proof of mailing just in case you ever need to prove you reported the trust as required.
Summing up: a special needs trust is absolutely the best way to make sure a loved one continues to receive vital government benefits while maintaining additional needs. While the ins and outs of such a trust are not complicated, relying on a professional to create the account and potentially manage it, are key factors in making sure all a beneficiary’s needs are met.
Written by Eric Keating