Special Needs Trusts are used in estate planning to protect assets for a disabled beneficiary and preserve his or her eligibility for government assistance such as Supplemental Security Income (SSI) and Medical Assistance (MA). There are several types of Special Needs Trusts; how they are used in your plan will depend on the facts of your case.
I frequently meet with clients who have a child or grandchild with a disability. In some cases, these beneficiaries are receiving government assistance. Programs such as SSI and MA have asset limitations that can vary depending on the program. Often there is a $2,000 resource limit. If a beneficiary receives an inheritance, it can affect their benefits unless they “spend down” what they receive. To avoid losing those benefits, a parent or grandparent can leave money to the disabled beneficiary in a type of trust commonly referred to as a “Special Needs Trust.”
If a third party (parents, grandparents, etc.) is creating a trust to protect a family member’s inheritance, the Special Needs Trust is often located in a Will or other estate planning document, such as a Revocable Trust. The Special Needs Trust is not funded until the death of the person who wants to leave money to the disabled beneficiary. However, it is also possible to create and fund a Special Needs Trust during lifetime.
A lifetime Special Needs Trust not only serves the function of protecting assets for the disabled beneficiary but also preserves assets for the older adult who is concerned about their own long term care costs such as nursing home care. The Medical Assistance rules provide that transfers to an irrevocable Special Needs Trust, solely for the benefit of a disabled beneficiary, are transfers that do not create a period of ineligibility if the older adult applies for Medical Assistance for nursing home care within five (5) years of the transfer.
One of the benefits of having a Special Needs Trust in a Will or other estate planning document is that the trust can be removed if circumstances change and the trust is no longer needed. Special or “supplemental” needs trusts are meant to supplement, rather than replace, the government benefits the beneficiary is receiving. The funds in the trust are intended to pay for what the government programs do not cover. They can be drafted to allow the trustee of the trust to use the funds to pay for more comfortable living conditions even if those expenditures would adversely affect the government assistance.
What if a disabled beneficiary receives an inheritance or personal injury settlement directly? Fortunately, there are other versions of special needs trusts that can be used to help preserve those funds. These self-funded trusts are controlled by Federal and State statutes outlining the rules relating to a payback for Medical Assistance benefits. These trusts can be used if no third-party trust was created, or if the proceeds were paid outright to the beneficiary. A variation on the first party trust is the Pooled Special Needs Trust, where the inherited assets are placed in an existing Special Needs Trust account run by a non-profit organization. Funds remaining in the pooled trust account at the death of the beneficiary are used for charitable purposes. Pooled Trusts are intended to be used for beneficiaries under the age of 65.
Given the complexity involved with creating Special Needs Trusts, including the tax considerations, it is recommended that you have a consultation with an attorney who has experience in special needs planning.
Matthew J. Parker, Esquire is an attorney at the law firm of Marshall, Parker & Weber, LLC with offices in Williamsport, Jersey Shore, and Plains. For more information visit www.paelderlaw.com or call 1-800-401-4552.