For persons with disabilities, the aid provided by programs such as Supplemental Security Income (SSI) and Medicaid help not only them, but their family, navigate the financial challenges they will face in their lives. Because of this, ensuring steady access to these services is of utmost importance and must be treated with special consideration.
As these programs often have strict eligibility requirements, there are certain financial safeguards a parent or guardian can put in place to secure these benefits in cases where monetary gifts might put such benefits at risk. One such method is the use of a special needs trust.
Below is a quick guide outlining special needs trust rules (and how to create one) for individuals considering this option.
The Basics: What is a Trust?
Before looking at the types of special needs trusts available, it’s important we understand the function of a trust.
There is a common misconception that in order to open a trust, an individual must already own a large number of assets. This is not the case.
Simply put, a trust is a legal document which gives a third party individual the responsibility to manage the assets within the document in the way of your choosing. The individual responsible for disbursement of assets is known as the Trustee while the individual who benefits from these disbursements is known as the Beneficiary.
While there are several different trust types available, the most common trust for a person with disabilities is called a special needs trust. This type of trust makes sure that the assets within the trust are used for the express purpose of providing care to the person with disabilities without inadvertently jeopardizing that individual’s public benefits eligibility status.
Why is a Trust Important for Disabled Individuals?
For disabled individuals, trust assets are a safety net. Oftentimes their care is only partly covered by SSI benefits and Medicaid programs, leaving many unmet needs in their path. However, openly transferring cash assets into the name of a disabled person will count as income, thus undermining their eligibility requirements for public goods or services.
Creating a special needs trust for the disabled individual circumvents this dilemma. The whole philosophy behind a special needs trust is that the disabled person has NO control over the assets in that trust. The disabled person is not given an ATM card, nor consulted on any investment decisions. It is this lack of control that enables disabled individuals to have special needs trusts and government benefits.
Two Types of Special Needs Trusts
In the category of special needs trusts, there are two main types: third party and first party trusts. While the nuances between the two are many, a general rule of thumb is that a third party trust holds assets that do not belong to the beneficiary whereas first party trusts hold assets that do belong to the beneficiary.
A third party trust is typically set up to receive assets when someone dies. For example, parents will set up a special needs trust to hold onto an inheritance intended for the benefit of their disabled child. The child does not “own” the assets, the parents do.
In cases where the beneficiary receives a gift, settlement, or inheritance and thus personally owns those assets, a first party trust would then need to be created.
In both situations, the trusts are designed to offset assets from the beneficiary’s ownership, thus allowing them to remain in compliance with eligibility requirements as dictated by public benefit institutions.
What the Beneficiary Receives: How to Maintain Eligibility
Even after the trust has been created, it is important to make sure your Trustee is fully informed about the method in which they can disburse assets without jeopardizing SSI or Medicaid eligibility.
A beneficiary can basically have only $2,000 in assets in their own name.
A beneficiary cannot own or be awarded the following without jeopardizing their eligibility:
- Cash, checking, or savings accounts
- Stocks, bonds, investments, IRAs, or 401(k)s
- Any additional property which brings their net worth above $2000 per month.
SSI and Medicaid eligibility are subject to change. As such, it is best practice to double check all requirements periodically to make sure you are (and stay) in compliance. To learn more about the above resources, see the following link at ssa.gov.
Can a Special Needs Trust be Amended or Revoked?
The short answer is yes. Here are some common reasons for amending or revoking a special needs trust.
If the needs of the beneficiary over time, or, if their needs were not initially assessed correctly, this can be grounds to amend the provisions within the trust.
Improvement of the Beneficiary’s condition
In cases where the beneficiary’s condition improves and they no longer need the extent of care previously provided for, this may also be grounds with which to amend the original trust.
Change in Law
When changes occur in legislation that affect eligibility requirements, the provisions in a trust can be amended to ensure the beneficiary still remains eligible for public services while receiving trust fund aid.
Death of the Beneficiary
Most often the terms of a special needs trust will indicate a termination of disbursements upon the beneficiary’s death. In cases where this provision is included, additional measures must be taken to ensure there are provisions in place for the disbursement of the remaining assets.
Speaking With a Lawyer
Unlike garden variety estate planning, a special needs trust must address many disability-specific concerns. As such, it is both easier and more effective to speak with an attorney and avoid the common pitfalls of self-drafting a trust.
With over 20 years of estate planning experience, there is very little I have not seen. Contact me at (602) 996-4076 to set up an appointment and we can begin the process of drafting the trust that is best for you and your loved ones.