Special Needs (or Supplemental Needs) Trusts 101
Family members of individuals with disabilities and mental illness often are concerned about long-term care issues and how to afford them above and beyond the care given through federal and state programs. Many parents consider a special needs trust as an option to put back funds for such long-term needs to maintain independence or a particular level of care.
A special needs trust (or supplemental needs trust) is created to ensure that beneficiaries who have a disability or mental illness can enjoy the use of property which is intended to be held for their long-term benefit and care. A special needs trust is most often a “stand alone” document, but it can form part of a Last Will and Testament. Such trusts have been in use for many years, and were given an “official” legal status by the United States Congress in 1993.
In addition to personal planning reasons for such a trust, because the person may not have the mental capacity to handle their financial affairs, there may be tax advantages. Special needs trusts may also avoid beneficiaries losing access to essential government benefits. It all depends on how it’s handled.
A trust for a beneficiary with a disability may be set up in any common law country or other countries which recognize the concept of the trust. They have particular advantages in legislation in relation to both taxation and state benefits in relation to the provision of healthcare, long-term care and nursing home benefits under the state-sponsored Medicaid welfare system in the United States.
Such benefits may include Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, subsidized housing, and other benefits based upon need. For purposes of a special needs or supplemental needs trust, an individual is considered impoverished if his or her personal assets are less than $2,000.00. A special needs trust provides for extra care over and above that which the government provides.
A common feature of trusts in all common law jurisdictions is they may be run either by family members (a private trust) or by trustees appointed by the court. Especially when a trust is established for a child or young person with a disability, great care is taken in the choice of appropriate trustees to manage the trust assets and to deal with future replacement appointments. The use of a private discretionary trust can not only be more efficient in terms of taxation and access to government benefits such as Social Security disability benefits, but can also allow for more efficient investment of funds held than where funds are held by a court official.
Special needs trusts are often set up under the guidance of a structured settlement planner in cooperation with a qualified legal and financial team to ensure the trust is set up correctly. Other types of spendthrift or family trusts aren’t appropriate for individuals with specialized healthcare needs because they don’t address specific needs of the beneficiary with a disability or his or her future lifestyle. Even in situations where a family may have significant resources to help a family member with a disability, a supplemental needs trust should be established to address these issues.
Monies placed in the trust remain non-countable assets and allow the beneficiary to qualify for available benefits and programs. Why sacrifice services that might be available to your relative now and in the future? At a bare minimum, the trust should state that it is intended to provide “supplemental and extra care” over and above that which the government provides for the child with a disability or mental illness and state that it is not intended to be a basic support trust.
So, when should a special needs or supplemental needs trust be established? At any time before the beneficiary’s 65th birthday is a good time to establish the trust. It is very common to create a special needs trust early in a child’s life as a long term means for holding assets to benefit the family member with a disability or mental illness as they grow. This is particularly true of parents who wish to leave funds for a child’s benefit after the parents’ death.
Many people neglect to set up trusts when they receive assets, particularly lump sums of governmental benefits. However, it is still crucial to recognize that funds received as “back pay” for SSI or SSDI claims become income to the beneficiary when received. Ironically, this sudden influx of income can disqualify a person from the benefits they were just approved for.
For SSI, the rule is straightforward. A recipient cannot have more than $2,000.00 in assets. SSDI employment, income, and asset limits are more complex and confusing, and need to be anticipated.
In some situations, there may be repayment obligations. A properly drafted trust will address the issue concerning paybacks to Medicaid or other such sources. A special needs trust that is funded by parents or other third-party sources will not be required to pay back Medicaid. Trusts funded by a personal injury settlement that is properly court-ordered into the trust will not be required to pay back Medicaid. The only assets within the trust subject to repayment are those assets which originally belonged to the individual with a disability that are transferred into the trust.
Using a law firm that specializes in special needs issues assures the attorney is familiar with the benefits systems, the proper creation of the trust, and ultimately the defense of the trust in the event that it is challenged by a court, the Social Security Administration, Medicaid, or the like.
About Author: Monica J. Foster is the “The Life Beyond Limits Coach”
Visit her at www.butterflywheel.com
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