Estate Planning is important at any stage in life, but it becomes even more essential when you have a loved one with special needs. Putting the right plan in place means you can rest assured that you’ve done everything in your power to protect them even when you’re not there anymore. A Special Needs Trust is an Estate Planning tool that lets you better protect your disabled loved one without putting their eligibility for government-offered benefits, like Supplemental Security Income (SSI) and Medicaid, at risk.
Trying to plan for a future you can’t control can feel overwhelming, but that’s why we’re here to help you along the way. Whether you need to set up a Special Needs Trust for your loved one, or if you have a Special Needs Trust and have questions, this guide will answer everything you need to know.
Read on, as we discuss everything from Special Needs Trust rules, to how this type of Trust is taxed, to what you can and cannot do with this type of Trust. We’ll look at:
What is a Special Needs Trust?
A Special Needs Trust is a specific type of Trust that’s set up to take care of any person with a disability. The Trust can supplement public benefit payments without jeopardizing eligibility for those benefits.
One of the most important aspects of this type of Trust is that it allows a mentally or physically disabled person to access the assets without the Trust’s value affecting or reducing government assistance. The Trust also adds a layer of protection from the government attempting to access funds from inheritances or other sources.
There are three types of Special Needs Trusts, which we’ll cover in more detail below.
How does a Special Needs Trust Work?
A Special Needs Trust works similarly to other Trusts - you must set it up and fund it before it can have any power.
Setting up a Special Needs Trust:
Create the Trust document
As the Grantor (or Settlor, the person setting up the Trust), you’ll name a to manage the assets inside the Trust
You can be the Grantor and the Trustee
Name a Successor Trustee to take over in the event you become incapacitated or once you pass away
Name the person with special needs as the beneficiary of the Trust
Upon signing and notarizing it, the Trust goes into effect
Funding a Special Needs Trust:
You’ll get a Trust Tax ID number (from the IRS)
You can then add assets to the Trust
Other parts of your Estate Plan (Living Trusts, Wills, beneficiary designations, etc.) can fund the Trust, along with bank accounts and other assets or property
How a Special Needs Trust can be utilized:
Concerts or other experiences
Services - cleaning, phone, internet
Personal attendant or therapy
Computer or phone
How a Special Needs Trust can’t be utilized:
Large cash gifts
Anything that would result in ineligibility for benefits provided by the government
Note: it’s important to be careful with things such as shelter/housing or food. These could potentially cause a reduction in Supplemental Security Income (SSI) benefits. There are exemptions that might make it feasible and beneficial, but be aware of this caveat.
Types of Special Needs Trusts
There are three types of special needs trusts that we will discuss in further detail below:
Third Party Special Needs Trust
First Party Special Needs Trust
Pooled Special Needs Trust
Third Party Special Needs Trust
A Third Party Special Needs Trust offers financial security for those with special needs who can’t earn any sort of sufficient income or live on their own. This type of Trust is often used as a part of a family member’s Estate Plan - for example, a parent or grandparent may create their own Estate Plan that then funds the SNT for the benefit of the person with special needs.
Benefits of a Third Party Special Needs Trust:
Trust can be used for anything a beneficiary needs
No limit to how many assets are in the Trust
Government cannot have a claim against any Trust assets
Will never impact government benefits eligibility
First Party Special Needs Trust
A First Party Special Needs Trust, also known as Self-Settled SNTs, are commonly used for an individual to hold assets he or she may have received from a lawsuit or inheritance. First Party SNTs can be appropriate for anyone with a disability that stems from an injury. It would be funded by the disabled individual’s own assets to benefit them.
Benefits of a First Party Special Needs Trust:
Allow any settlement to move into the Trust for future use and expenses
Settlements would not affect future eligibility for any needs-based programs or services such as SSI or Medicaid
Trust assets and funds can be used for a variety of needs and services, including therapies, nursing care, diet or medical needs, etc.
Pooled Special Needs Trust
Pooled Special Needs Trusts are sometimes beneficial if a standalone First Party or Third Party Special Needs Trust isn’t enough after a personal injury settlement or another large sum of money like an inheritance is awarded. A Pooled Special Needs Trust would combine several beneficiaries’ resources to be managed by a nonprofit organization. The main purpose for a Pooled Trust is to take advantage of larger investment opportunities. They can also be beneficial from a cost-effectiveness standpoint.
Benefits of a Pooled Special Needs Trust:
The nonprofits are staffed by those experienced in special needs planning and up to date with benefit rules
Long-term stability - a Trustee won’t need to be replaced due to incapacitation or death at any point
Preserves government assistance eligibility
Special Needs Trust Rules - What can a Special Needs Trust Pay For
If you’re setting up a Special Needs Trust, there are several things to be aware of. First and foremost, it’s very important that the Trustee understands when administering the Trust what they can or cannot do so they don’t jeopardize the beneficiary’s SSI or Medicaid eligibility.
Also, there are some age restrictions for certain SNTs. First Party Special Needs Trusts must be established prior to the beneficiary turning 65 years of age. Third Party SNTs have no age restrictions, and Pooled SNTs generally have no age restriction, but some state regulations may penalize Trusts funded after age 65, so it’s worth checking on.
Finally, keep in mind that Special Needs Trusts are irrevocable, meaning they can’t be revoked - the benefit here is they also can’t be seized through litigation or by creditors. And of course, when administered properly, they won’t affect eligibility for income-restricted government services or aid.
A Special Needs Trust can hold assets, property and money that the Trustee can use on behalf of the beneficiary. There are very specific Special Needs Trust spending rules that you should be aware of. For example:
Money from a SNT can’t go directly to a beneficiary to purchase something for him or herself - rather, money needs to be paid directly to a service provider or vendor, or paid for by the Trustee.
SNT funds can’t be used to pay for household repairs, food or for monthly bills.
Household goods and items should be purchased in the name of the Trust, not the beneficiary.
Rent or mortgage payments, along with property taxes or HOA dues should not be paid for by the SNT; however, the outright purchase of a home may not affect eligibility (but it’s worth pointing out that how you title the house should be carefully thought out so there are no financial repercussions upon the beneficiary’s death).
Prepaid funeral arrangements and burial arrangements can be purchased by the Trust for beneficiary.
Ways you can fund a Special Needs Trust:
Cash (can be a gift)
Property (personal and real)
Retirement plan benefits (IRAs, pensions, 401ks)
Proceeds from a settlement in a personal injury case (First Party SNT)
Estate Planning for Special Needs: Commonly Asked Questions
Now that we’ve discussed the basics, let’s dive into a few commonly asked questions so you have a complete understanding of SNTs.
Can You Dissolve a Special Needs Trust?
You cannot dissolve a Special Needs Trust as they are set up as irrevocable. There are very limited provisions for changing or amending a Special Needs Trust.
Is a Special Needs Trust Simple or Complex?
Special Needs Trusts are typically considered what’s known as a Complex Trust. This designation is intended for tax purposes and the Trust itself will report income or deductions as well as credits. In contrast, a Simple Trust would require distributions of all earned income to the beneficiary, so it could never be a SNT.
Are Special Needs Trusts Taxed?
Special Needs Trust taxation rules can be complicated. The basic rule is that Third Party Special Needs Trusts are taxed as a pass-through entity and the Trust would file a tax return to report any income earned. First Party Special Needs Trusts, because they are self-funded, would have income taxable to the beneficiary. They would thus not be taxed at the Trust level.
Who Qualifies for a Special Needs Trust?
Who qualifies for a Special Needs Trust depends on which type of Trust is being set up. First Party SNTs can be established for anyone disabled under the age of 65. Any age qualifies for a Third Party SNT. Most often, there are no age restrictions on Pooled SNTs, but certain state regulations may impose penalties on Trusts established for beneficiaries over the age of 65. SNTs are often created by a parent, grandparent, guardian or the court. However, per The Special Needs Trust Fairness Act, a beneficiary (the person who will benefit from the Trust) can now set up a Special Needs Trust on his or her own behalf as long as they are competent.
Special Needs Trust Funds can be beneficial on many levels. They can provide financially for your loved ones without having any negative impact on government benefits and aid, and they can be tax beneficial. Proper Estate Planning for a special needs child or loved one can offer you peace of mind, as you can be confident they’ll be cared for both now, and in the future.
If you’re not sure if an SNT is right for you, or if you have any questions about whether or not you would qualify, chat with a Trust & Will member success representative today!
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