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A Special Needs Trust also known as a “Supplemental Needs Trust” is a way to provide for a loved one with a disability or functional needs to receive financial support without negatively affecting any means-tested government benefits. If financial security for them is a top priority for a person receiving government benefits, here’s more information about how these Trusts work.
What is a Special Needs Trust?
A Special Needs Trust, also known as a Supplemental Needs Trust, enables a person with a disability or functional needs to hold assets and still receive Supplemental Security Income and/or Medicaid. Because needs-based government benefits have income and asset limits, otherwise, receiving financial gifts or assets could reduce or eliminate eligibility.
If you have an adult daughter with autism on SSI benefits and want to give her money to meet her living expenses, she could be disqualified from receiving needs-based government benefits. Likewise, if you die and leave her your Roth IRA exceeding the asset limit, she could no longer receive SSI or Medicaid. But if you put the assets into a Special Needs Trust for your daughter, she can keep her benefits and receive your financial support for the rest of her life.
What can a Special Needs Trust pay for?
Money in a Special Needs Trust is meant to be a supplemental resource, meaning it should cover expenses not covered by government benefits. More specifically, the Beneficiary should use the money for expenses other than food and shelter. The money is spent in accordance with IRS guidelines with verification of a spreadsheet.
What are the benefits of a Special Needs Trust?
Setting up a Special Needs Trust can help you enhance the quality of life and give you peace of mind. These Trusts ensure that a person with functional needs will receive the financial support they need throughout their lifetime whether you’re here or not. Here are a few key benefits of Special Needs Trusts:
- Your loved one can still receive needs-based government benefits.
- In some situations, creditors can’t access the funds or assets in the Trust.
- Trust funds can be invested by a Trustee or financial advisor.
- You may be able to have control over who inherits the Trust when the Beneficiary dies.
- Trusts provide protection against financial abuse, as Trustees have a fiduciary duty to act in the Beneficiary’s best interest.
What are the types of Special Needs Trusts?
There are different types of Special Needs Trusts: Third-Party Special Needs Trusts and First-Party Special Needs Trusts. Third-Party Special Needs Trusts are more common. How you plan to fund the Trust will determine which type is most suitable for your loved one.
Third-Party Special Needs Trust
This type of Special Needs Trust is funded by someone other than the Beneficiary. A real-life example would be the parent, grandparent or guardian opening and funding the Trust. Third-Party Special Needs Trusts aren’t only for individuals with disabilities; they can also be used for someone who struggles to manage their finances. This type of Trust can be used for an individual dealing with substance abuse, gambling addiction or anything else that might hinder them from managing their own money. In this case, the Trust is called a spendthrift Trust. An advantage of a Third-Party Special Needs Trust is you can appoint secondary Beneficiaries to inherit the remaining funds when the original Beneficiary dies.
There are two ways you can set up a Third-Party Special Needs Trust:
- Stand-Alone Trust: If you plan to financially support your loved one throughout your lifetime and have other relatives or friends who may want to contribute as well, this may be the best option.
- Testamentary Trust: This may be more suitable if you’re estate planning and want to leave the Trust as an inheritance, but don’t want to give the Beneficiary access to the Trust immediately. Contrary to the Stand-Alone Trust, this method creates the Special Needs Trust under your will or Trust, so it isn’t funded until you die.
First-Party Special Needs Trust
The difference between a First-Party Special Needs Trust and a Third-Party Special Needs Trust is that the First-Party version is funded with the Beneficiary’s own assets. If a person with functional needs is mentally capable, they can set up and fund their own First-Party Trust. Alternatively, a relative, guardian or court can set up the Trust and fund it with the Beneficiary’s assets.
Unlike Third-Party Special Needs Trusts, a First-Party Trust version typically must have a Medicaid repayment provision. This means when a Beneficiary dies, any remaining money goes to repaying Medicaid and if anything is left, it goes to listed Beneficiaries.
Still, a person with functional needs might choose this type of Trust if they’ve received a windfall, such as a settlement for medical negligence or an inheritance. It may also be ideal for an individual who has existing assets, becomes disabled, but needs to qualify for means-tested benefits.
To qualify for a First-Party Special Needs Trust, the Beneficiary must have a disability, be under age 65 when the Trust is established, and the Trust must be irrevocable.
Pooled Trusts combine Trusts for multiple beneficiaries and can be either First-Party or Third-Party Trusts. Pooled Trusts are typically managed and invested as one, with subaccounts for each Beneficiary. Pooled Trusts also have to be set up and managed by a nonprofit organization. The nonprofit acts as the Trustee, administering funds, making investment decisions and meeting tax obligations. Convenience and oversight are often why people choose Pooled Trusts.
How to Set up a Special Needs Trust?
- Determine How Funds will be Distributed.
- How much money they need and how long it should last.
- How frequently you want them to receive money.
- How much you want them to receive.
- What needs can be met with the money.
- What will happen to any remaining money in the Trust once they die.
- Whether they will have control of assets.
- Choose Trustees
A Trustee will help manage, invest and disburse funds for your loved one, so choose wisely. You can also choose contingent Trustees, so you have a backup in case something happens to one.
- Create your Trust
The wording used in the Trust documents is important. The wrong wording can create issues that disqualify beneficiaries from receiving government benefits. All parties need to sign, and it must be notarized. Also, the Trust must be registered with the IRS for tax purposes.
- Funding the Trust
After all parties have signed the Trust documents, it’s time to fund your Special Needs Trust. The Special Needs Trust maybe funded with cash, investments, life insurance policies. You can also designate property you want to hold in a Special Needs Trust through your will, Beneficiary designations on bank or brokerage accounts, or retirement plans.
- Invest your funds
It is generally suggested moderate investments fund the SNT in order to access funds when necessary.
J Douglas Sunseri (firstname.lastname@example.org), Michelle Demarest Sunseri (email@example.com) and Kathryn Sunseri (firstname.lastname@example.org) of Nicaud & Sunseri Law Firm have drafted hundreds of Special Need Trust for individuals with disabilities and special needs. Please contact us at 504-837-1304 or 985-624-9697 to discuss Special Needs Trust in the context of estate planning.
Going through a very NASTY divorce Michelle Sunseri and her staff were super caring, helpful, sincere, trustworthy,and honest. They really went the extra mile. I highly recommend.
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