What's a Special Needs Trust?
A special needs trust, also known as a supplemental needs trust (SNT), is a legal arrangement that helps provide for a person with disabilities without disrupting their eligibility for government benefits. This type of trust can be used to hold and manage money or other assets on behalf of the beneficiary.
Special needs trusts are an important tool for families with members who have disabilities, providing financial stability and security. They can also be used as an estate planning tool alongside life insurance policies to ensure your loved ones are protected after you’re gone.
These trusts allow the beneficiary to access government benefits like Social Security or Medicaid, as both of those assistance programs have income limits.
If you’re wondering whether the special needs trust is right for you and your family, here’s what you need to know.
Who would benefit from a special needs trust?
A special needs trust is incredibly beneficial for those with permanent or temporary disabilities. This includes those who receive Supplemental Security Income (SSI), Medicaid benefits, or cannot manage their own finances. Programs like Medicare and Social Security Disability Insurance don’t have income restrictions.
This type of trust can be used to ensure that the individual is provided financial stability and resources throughout their lifetime. Trust funds belong to the beneficiary, and should not affect their eligibility for government benefits.
How is a special needs trust structured?
A special needs trust must be carefully structured to ensure that it complies with the laws and regulations governing public assistance programs. The structure of a SNT varies depending on who’s funding it and what types of benefits the beneficiary receives.
Generally, SNTs are created and funded by someone other than the beneficiary, typically a parent or grandparent. The person who sets up the account is known as the grantor. The SNT also names a trustee who is responsible for managing the assets and overseeing distributions.
The trustee has legal obligations and responsibilities, including making sure that any disbursements are used to benefit the beneficiary. They must also adhere to state and federal regulations governing SNTs.
Types of special needs trusts
There are three main types of special needs trusts:
- Self-settled trusts (also known as first-party special needs trusts)
- Pooled special needs trusts
- Third-party special needs trust
Each type of trust is typically established by either the trust beneficiary or another individual that has an interest in protecting the beneficiary’s assets, such as a parent or grandparent.
Generally, special needs trust can be complicated and hard to set up, so it’s important to talk to an attorney when deciding which SNT best suits your situation.
First-party special needs trust
A first-party SNT is established with the beneficiary’s own money. These trusts are typically used when a beneficiary receives an inheritance or settlement proceeds, such as from a personal injury lawsuit or divorce.
Typically, the person creating the trust either has a disability or chronic illness, or is preparing for the future. This type of trust allows the disabled individual to retain ownership and control of their assets while still protecting them from any potential disqualification for government benefits.
Third-party special needs trust
A third-party SNT is established by someone other than the beneficiary, like a parent or grandparent.
This type of trust can be used to protect assets for an individual with disabilities and is managed by a trustee, who has a fiduciary duty to follow the trust’s rules. This is a great option for families who want to provide additional financial support to their family members or loved ones without compromising government benefits.
Pooled special needs trust
A pooled trust is set up by a non-profit organization, such as a disability advocacy group.
This type of trust allows for multiple individuals to pool funds and resources in order to maximize their access to government benefits. Each beneficiary has an account within the larger trust, but all assets are managed and maintained by the non-profit.
A major advantage of this type of trust is that it can provide more flexibility, as each individual beneficiary’s account may have different rules or investments depending on their needs.
Special needs trusts rules
When setting up a special needs trust, it is important to be aware of the rules and regulations that will govern how the trust works.
All special needs trusts must meet certain criteria in order to qualify as exempt from taxation or government benefit eligibility requirements. An attorney can walk you through the details.
Special needs trusts are irrevocable
SNTs are irrevocable trusts, meaning they can’t be altered once you create them.
The trust is managed by a trustee, who distributes the funds according to the trust rules set in place. Distributions are only used for the sole benefit of the beneficiary, with no other individuals having access to the funds for their own use.
How the funds should be used
The money in the trust shouldn’t be used for expenses that conflict with things that you would use your government assistance money on, like food or housing. That could reduce the beneficiary’s Social Security Income. Instead, money in the trust should be used for things like clothing, caretakers, education, and health care.
How to set up a special needs trust
Special needs trusts can be a great way for families with members who have disabilities to provide financial security without disrupting access to public assistance benefits. However, it’s important that the trust is set up correctly in order to ensure that the beneficiary maintains their eligibility for government programs.
To create one, consult with a lawyer who is knowledgeable in the field of special needs trusts. They can help you prepare a trust document that names the trustee, beneficiary, and other specific instructions.
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