- March 3, 2020
- Posted by: Matthew Luedke
- Category: Special Needs Planning
The main function of Special Needs Trusts are to ensure future aid for a dependent without triggering a disqualification from government aid programs. As is the case with many other kinds of trusts, funds within these trusts are protected from claims of creditors, which includes credit card companies, landlords and other lending institutions. Any assets held within an SNT are managed and invested by one or more trustees, which usually includes family members and other independent and vetted financial professionals. Additionally, for a third-party trust, any individual who creates the trust (the grantor) typically has the ability to control where any funds remaining will be directed upon the death of the beneficiary.
Why Set Up a Special Needs Trust?
There are numerous reasons why parents of children with special needs should plan their estates with care. In addition to issues of guardianship and the ostensibly endless challenge of assessing what governmental and private resources might be available to improve their child’s quality of life, there can be difficulties due to the mandatory cap on income and assets if a child is receiving Medicaid or Security Supplemental Income (SSI).
Luckily, a financial planning tool known as a Special Needs Trust (SNT) is able to provide parents with a financial safety net for ongoing costs for their child’s care without endangering eligibility for government assistance. These SNTs may be used to fund and to supplement health-care costs, travel, entertainment, pet care services and other expenses that can significantly improve a dependent’s quality of life – particularly in the future when their primary caregivers may no longer be around.
What are the Options for Special Needs Trusts?
Before creating any SNT, it’s important that you decide what iteration of the trust vehicle is best for you and your family. One option for an SNT would be a “first-party” also known as a “self-settled trust”. This is often used when a disabled party owns a piece of property before the onset of the disability, gets an inheritance outright, or receives a court-mandated settlement.
For a parent with disabled children, creating a third-party special needs trust is a commonplace solution. Such trusts are created and funded by any party other than the beneficiary, and will often name an impartial party as the trustee or co-trustee.
One key difference between third-party special needs trusts and self-settled special needs trusts relates to control of the assets upon the death of the beneficiary. After the beneficiary’s has passed away, a trustee of a self-settled SNT would be required to use any remaining assets to pay back their state for any Medicaid benefits received by the beneficiary during their lifetime. This is in contrast with third-party SNT’s which can designate additional beneficiaries, making them a useful planning device for those who both want to protect a primary beneficiary with disabilities as well as control the distribution of assets to others (usually other members of the immediate family).
Another affordable option is to utilize an ABLE account (which stands for Achieving a Better Life Experience Act of 2014). ABLE accounts are state-managed trusts that are fairly similar to a College 529 Plan. These types of trusts are funded with after-tax dollars and have valuable ongoing income tax benefits for a disabled beneficiary who is also an account owner.
Lastly, families should also look into investing in pooled asset trusts which are managed by a nonprofit organization. In this type of trust, assets from many different sources are combined and then invested collectively. These funds are used to support beneficiaries in proportion to their share of the overall pool. Such a trust could be a viable option for a caregiver who may not have enough resources to support their disabled dependents with the care they either currently need or likely will need. However, keep in mind that every pool is set up differently and it’s important to conduct appropriate due diligence on all of the available options.
We’re living in an era where you can find estate and trust solutions readily available online, however we strongly advise seeking professional legal expertise in order to best meet your family needs using every available resource. The laws surrounding Special Needs Trusts can be extremely complex to navigate and the rules surrounding welfare programs are constantly shifting. Any mistakes with the planning process may endanger a beneficiary’s ability to access critical government resources, and these are usually extremely costly to a family when lost.
View this post from Forbes to learn more about Special Needs Trusts: View the Post