A special needs trust is a legal arrangement that allows a person with a disability to receive financial support without disqualifying them from government benefits. Learn more about how special needs trusts work and how they can benefit your loved one.
What Is a Special Needs Trust?
A special trust for those with special needs (SNT) is an arrangement in law that permits those with disabilities to receive financial assistance but not be denied government benefits such as Medicaid and Supplemental Security Income (SSI). The trust may be set by the person suffering from disabilities, their parents, a family member, or a friend.
There are two significant kinds of SNTs:
- First-party SNTs are financed by those assets owned by the individual with disabilities. This type of trust may be difficult to establish since it requires the individual who has disabilities to surrender the control of their property. However, it could be an ideal option if the disabled person is wealthy with many assets they wish to shield against creditors and other risks.
- Third-party SNTs are funded by the assets of a person not related to the person who has the disability, for example, grandparents, parents, or siblings. These trusts are much easier to establish and manage and do not require individuals who cannot relinquish control of their assets.
How Does a Special Needs Trust Work?
An SNT may offer a variety of benefits and still maintain the eligibility of government benefits for those who have handicaps or other special requirements; however, it’s crucial to know the time when these benefits expire and the costs the SNT can cover.
Benefits of a Special Needs Trust
TrustTrust for special needs children is crucial to your child’s overall well-being and has many benefits.
- The trust’s assets are not considered when deciding on eligibility for federal government programs such as Supplemental Security Income (SSI) and Medicaid.
- Parents select as the trustee or administrator “trustee” of the trust. Common choices include family members and trustees who are professionals.
- Trustees have a fiduciary obligation to do what is in the best interest of their beneficiaries.
- The trust’s assets trust for special needs can be used for a wide range of costs that are not covered by government benefits, like dental or medical expenses that are out of pocket, such as personal caregivers rehabilitation and education, as well as vacations, car or home repairs, and other recurring costs.
When Do the Benefits of an SNT End?
The advantages of trusts for unique needs can end up in many scenarios, such as:
- The trust is running without funds.
- The beneficiary is no longer regarded as someone with disabilities or special requirements.
- The beneficiary dies.
What Kinds of Assistance Does an SNT Benefit Provide?
Trusts for special needs are created to complement federal benefits but not replace them. SNT trust funds can be utilized in any manner the trust is comfortable with as they’re not spent on items the beneficiary already receives aid. Here are some typical examples of how SNT funds are utilized:
- Dental and medical expenses are not included in the insurance.
- Services for rehabilitation and therapies
- Education expenses, like tutoring or special needs schools
- Costs for transportation and car costs
- Accessibility modifications or home modifications
- Travel and entertainment expenses
- Professional support services for care, such as housekeeping and personal care
Who Needs a Special Needs Trust?
If you’re a caregiver or parent of an infant who might not be able to sustain them due to a medical or disability illness financially, you ought to think about the creation of a trust for those with special needs. Trusts can provide extra financial assistance to an individual with a disability without disrupting the government’s resources.
Certain government benefits for people with specific requirements may be able to count on; for example, SSI, Medicaid, and others are “means tested,” meaning they’re only available to those with very little income or assets. They often have limitless assets. For instance, a person enrolled in SSI could only possess up to $2,000 worth of countable assets.
If a parent plans to provide financial support following their death to support a disabled person, their assets must be transferred correctly so that they don’t result in the person with special needs losing their benefits from the government.
Money left directly to the beneficiary with the benefit of a trust can erode these benefits, thereby cutting off the support and money of the person who is benefitting. The terms for establishing the trust for special needs can be included in a parent’s trust, but they do not need to be an independent document.
How to Set Up a Special Needs Trust
Take note of these steps when creating an SNT.
Consider Your Child’s Long-Term Needs
The first step to setting up the foundation of a trust is to define what role it is expected to play in your child’s life. The answers to these questions will help you establish trust and prepare to take the following steps.
- What amount of money will your child need to live the kind of life you would like them to enjoy?
- How long do you expect the trust to be able to provide financial support to your kid?
- When and how do you want to distribute funds?
- Does your child have any control over trust funds? Or do you want a third party to supervise the spending?
- If you have funds in the trust following the death of your child, where will that money be deposited?
Speak With an Attorney
A trust is a legally binding contract that can significantly affect your child’s life. Talking to a professional, particularly an attorney, will ensure that the trust accurately reflects the child’s requirements. An attorney will also be able to inform you if trusts are the right solution for your child’s unique situation.
When selecting an attorney, ensure that you choose an attorney who is well-versed in special needs trusts and the laws that govern the trust and benefit the trust.
Select a Trustee
Your child’s trustee SNT is the trust’s administrator and determines how the funds are distributed, staying up-to-date with current regulations and laws, making investment decisions, and ensuring that tax obligations are met.
A trustee could be a trusted family member, guardian, or parent who establishes the trust. They can also be professionals or companies specializing in trusts for people with special needs.
The Academy of Special Needs Planners, a group of trust officers, financial planners, and attorneys, recommends looking into a co-trustee partnership, where a professional trustee or non-profit organization and the parent or a relative are trustees together. When doing so, parents can offer invaluable insight into the child’s needs, while the non-profit or professional trustee can offer legal and logistical information.
Establish the Trust
As a legal document, the trust defines how your child’s trust is controlled and the purpose for which funds are intended to fund the trust. While trusts are different, however, the trust typically contains:
- The purpose of trust and how funds can (or cannot) serve to help your child
- The trustee’s name, as the name of any successor or co-trustees
- Specifications on how the trust will be to be funded
- Specifications regarding how income earned from trusts is to be handled
- The trustee’s responsibilities
- Beneficiaries who will receive trust funds if your child passes away
- Conditions under which the trust could be dissolved.
While you can make the trust your own, you should talk to an attorney experienced with trusts for special needs. This will ensure that the SNT conforms to federal and state law requirements and is in accordance with your wishes.
Fund the Trust
An unrelated SNT can be financed through various methods, such as financial donations from family members and friends or life insurance proceeds and inheritance. It is also possible to use various funding options.
Ensure that the funds are transferred to the trust in a way that is not direct to the child. If you direct your funds to your child, it could affect the eligibility for benefits.
Special Needs Trust Fund Fees and Taxes
Taxes and fees can vary depending on the kind of SNT. Talk to a lawyer or tax professional about the specifics of your situation to determine the costs and taxes associated with your SNT.
Special Needs Trust Fees
The cost of establishing a special needs trust can add up; however, the benefits of setting up one could outweigh the expense. These are the most common charges associated with setting up an SNT:
- The attorney charged was with drafting an agreement for trust.
- Trustee charges for managing the funds and ensuring that payments are made per the terms set out in the trust.
- Fees for accountants If the trustee engages an accountant for assistance with tax planning or prepares taxes for the trustor
Special Needs Trust Taxes
Depending on the kind of trust for special needs, It may or may not be considered an individual tax-paying entity to be taxed federally.
SNTs may be tax-exempt from different taxation (like estate tax and gift tax); however, the most frequent one is the tax on income on any dividends, interest, or realized gains earned by those trust assets.
In the case of a third-party special needs trust, the trust is responsible for submitting its income. Contrarily, since a first-party trust is financed by a disabled person receiving benefits, taxes on income are to be reported by the person.
Alternative to a Special Needs Trust
Parents of children with special needs don’t have to be restricted to creating trusts for special needs, but an SNT could provide the longest-lasting financial support. A different option is appropriate in some situations, for instance, when you cannot choose an experienced trustee or when the costs associated with creating an SNT exceed the amount you’re putting aside.