What is a Special Needs Trust?
A Special Needs Trust is a legally binding document which enables a beneficiary with a disability to have a good quality of life, yet still qualify for important government benefits.
Why is a Special Needs Trust Important?
As adults, it may be difficult for someone with a challenging disability to maintain employment on a regular basis. These individuals may need to rely on SSI (a monthly cash benefit) and Medicaid (a healthcare benefit) as they may be unable to get income or healthcare coverage without employment. Both SSI and Medicaid have strict limits on the amount of resources an individual can have in their name.
Protection of SSI and Medicaid is also important for children. Even if a child is not on SSI, they may already be receiving Medicaid benefits in the form of a Medicaid waiver, such as the Katie Beckett Waiver. Many parents do not realize that their child is on Medicaid as waiver programs may go by a different name depending on the state. Some waivers disregard parent income and resources, however, a child’s resources are still taken into consideration and must be less than $2,000.
How does a Special Needs Trust protect government benefits?
In a properly drafted Special Needs Trust, assets contained in the SNT are not considered countable assets for the purposes of qualifying for certain government benefits, such as SSI and Medicaid. This would allow the disabled child or adult to continue receiving government benefits and have a better quality of life. The disabled individual would be the beneficiary of the trust during his or her lifetime.
What can the trust be used for?
Purchases made by a Special Needs Trust can help your child reach his/her maximum potential and quality of life. A special needs trust can be used for just about anything that the government doesn’t already pay for under the benefit program the individual is receiving. This is just a partial list of “extras” that can be purchased by the SNT directly to a vendor for your child’s benefit.
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What is the maximum amount of countable resources that a person with a disability can own and still qualify for SSI and Medicaid?
$2,000
What is a Supplemental Needs Trust?
A Supplemental Needs Trust is another name for a Special Needs Trust. The main purpose of the trust is to supplement the needs of disabled individual beyond public benefits.
What happens if I die without setting up a special needs trust for my son or daughter?
If any assets are left to your child through your will, life insurance, or if your child is named as a beneficiary in other documents, your child may lose SSI and Medicaid. If this were to occur, there would be limited remedies available so that your child can once again begin receiving benefits. The options may include: spending down the amount inherited to the $2,000 maximum amount, converting the funds into non-countable assets (such as a house or a car), or transferring the assets to a self-settled special needs trust (see below). Assets cannot be transferred to another person or there will be a penalty imposed by SSI/Medicaid.
Unlike a third party special needs trust that could have been created during your lifetime, a self-settled special needs trust has a mandatory payback clause. At the end of the disabled person’s life, any remaining assets in this type of trust will be applied against any Medicaid expenditures. Assets remaining in a third party SNT do not have this payback requirement and other beneficiaries (such as siblings) can be named.
What happens if I die without a will?
All states have what are called “Intestacy Laws”. If a person dies without a valid will, state law will dictate the distribution of your assets, which may include distribution to your children. This would jeopardize the benefits of disabled children.
Can’t I just ‘disinherit’ my special needs child and leave her share with my non-disabled son? I’m sure he’ll do the right thing.
There are many problems with this scenario. Any “under the table” assistance or otherwise that your disabled child receives needs to be reported to Social Security and Medicaid. If the assistance is reported, it may reduce or even eliminate SSI/Medicaid due to income limits. If it is not reported, then both of your children will be committing fraud. Your disabled child will lose benefits and will likely be asked to repay benefits received, including repayment for Medicaid bills that were paid out and SSI checks that were paid during this period.
Another issue is that you are leaving your disabled child completely unprotected. Unlike the protection she would receive as beneficiary of trust, which creates a legal responsibility on the part of the trustee, a moral obligation does not offer any legal protection to a disabled person. On paper, the assets would belong to the non-disabled child. What would happen if your non-disabled child married someone who was unsympathetic to the disabled child? Your non-disabled child would have to choose between strive in his own marriage or helping out his sibling. If the non-disabled child got divorced, the assets he was holding for his sister would now be part of the divorce settlement. If the non-disabled sibling files bankruptcy or has issues with creditors, your disabled child’s ‘share’ would now be fair game. Finally, what would happen if the non-disabled child dies before the disabled child? A trust would provide for this scenario as another trustee would step in.
A special needs trust would provide protection for the most vulnerable member of your family. However, responsible siblings can have important roles in special needs planning if they wish to become involved (many don’t).
How much can be put into a Special Needs Trust?
There is no minimum or maximum amount that can be added to a SNT, although a very small amount may not make economic sense. A trust can be created at any time even if the intention is to not fund until the future (such as through a parent’s will or life insurance policy). The trust would just be on “stand-by” until it is funded. A small bank account in the name of trust can be opened and ready until more funds are available.
How is the SNT managed?
All trusts are managed by trustees. A trustee can be an individual, a bank, an accountant, an attorney, or another professional. A trustee can be one individual, an organization, or a combination, such as a person plus a bank serving as co-trustees.
Typically, the person or persons creating the trust name themselves as the initial trustees, but this is not necessary. The person creating the trust can also name a successor trustee and a mechanism for naming future trustees can also be stated in the document. Since trusts are meant to last a lifetime (and sometimes beyond), it would be impossible to name all future trustees at the time the original document is created. For more information on what is involved in managing a special needs trust, please see this blog post on the responsibilities of a trustee.
What are the different types of special needs trusts
Third Party SNTs are funded by someone other than the disabled beneficiary, usually the parents or grandparents of the individual. This type of SNT is typically used for family members who wish to provide a disabled family member with a better qualify of life. Beneficiary designations of wills and life insurance policies can often point the desired share to the SNT for the benefit of the person with a disability. The creators of the trust can also decide what happens to the remaining trust assets at the end of the life of the disabled beneficiary. This would allow parents or grandparents who are setting up the trust to decide who should receive any remaining assets left in the trust at the end of the life of the disabled beneficiary. Unlike self-settled special needs trusts, there is no payback provision with third party SNTs. The trust is managed by a trustee and successor trustees selected by the person creating the trust. The person creating the trust can name themselves as trustees if they wish.
Self-Settled SNTs are funded by the disabled person’s own assets. Often from a personal injury settlement, an outright inheritance, bank accounts or savings bonds in the name of the individual or from accumulated paychecks/ SSI checks, etc. Self Settled SNTs are more complicated than Third party Special Needs Trusts. Self settled Trusts must include a provision stating that the state will be paid back for Medicaid expenses with any Trust funds remaining at the death of the beneficiary. The person creating the trust can name themselves as trustees if they wish.
Pooled SNTs include assets for many beneficiaries and are managed by a non-profit association.
How do I find out more?
Contact a special needs law attorney in your state for assistance. If the disabled individual lives in a different state, contact an attorney where the disabled individual resides as Medicaid laws can vary from state to state. For assistance in Vermont, please click here to set up a consultation.