Special Needs Trust

Do you know someone with special needs and are thinking about gifting them funds to aid their cost of living expenses? If not using a Special Needs Trust, giving them funds directly could cause their monthly payments to go up.

Government Benefits

If someone you know has special needs from the day they were born, they may qualify for benefits provided by the government. Two main government programs may financially support them throughout their lives: Supplemental Security Income (SSI) and Medicaid.

These programs will offer monthly financial support payments to the family to take care of the person with special needs, but only under specific circumstances. The first criterion is that they need to meet the definition of what a disability is within each program, and the other is that they need to show a lack of financial resources. The asset and income limits are different depending on which state they reside in.

There should be financial limits on who can access these programs; it ensures that only those who need help will receive it. However, these limits create problems for those who want to gift resources to those with special needs because any gift, asset, or trust tied to their name is included in their resource total.

A typical example could be an individual wanting to take financial care of someone with special needs if they were to pass away. Two common ways to do that are to include them as a beneficiary of their trust or life insurance policy. These are great ways to take care of someone with special needs, but when paid out, they could cause them to go over the financial limits of the programs, causing them to lose more than gain.

But, opening something called a Special Needs Trust for the person with special needs and making the trust the beneficiary would allow these gifts to keep them from pushing them over the limits of these programs.

Third-Party Special Needs Trust

Frequently referred to as a “Supplementary Needs Trust,” this trust is used for those wanting to gift money to a person with special needs without affecting eligibility for government programs.

These trusts are set up by the donor, who contributes the funds, and are often a part of their estate plan if they pass away. The trust can be either revocable or irrevocable, with advantages and disadvantages. Third Party Special Needs Trusts can be the beneficiary of real estate, life insurance policies, and even investment accounts. There are no size limits on the amount that can be put into the trust, and there are no age limits on when a person with special needs can open the trust for them.

The money received in the trust can be a substantial financial help to cover the expenses of the person with financial needs that their current government programs don’t cover. The payouts from the trust are administered through an appointed manager or trustee that the donor selects. This individual will oversee how funds are distributed for different medical expenses, transportation costs, or even payments required for their caretakers.

The only downside to having this trust opened is that none of the special needs individual’s funds can be put into this trust. Therefore, any inheritance, life insurance policy, or gift directed to the individual can’t be put into the trust, which can cause them to forfeit government program benefits.

The trust ends at the death of the special needs person, and the remainder of the funds will be given to the other beneficiaries listed in the trust, which was chosen by the individual who originally donated the funds.

First-Party Special Needs Trust

Often referred to as a “Self-Funded Trust, ” this trust is used to hold the funds that a person with special needs does have to be eligible for government program benefits. This type of trust can only be opened for a special needs individual under age 65 when the trust is created.

The special needs person can open this type of trust if they are mentally and legally competent, or they can have one opened for them. This trust can only be opened as irrevocable, meaning that it is treated and taxed as a separate individual. Different states have different regulations, so the wording of this trust is very important. The trust manager, or trustee, is often a family member or a close relative.

The main disadvantage of this type of trust is that any funds that remain after the person with special needs passes will be given back to the state’s Medicaid division. The government views this as a reimbursement of benefits used during their lives.

Pooled Special Needs Trusts

The Pooled Special Needs Trust can be used to establish both first-party and third-party special needs trusts. These trusts are created and managed by nonprofit organizations and are irrevocable. Funds for multiple beneficiaries are pooled together, and a separate account is kept for each within the trust. This type of trust is still subject to Medicaid reimbursement with the remaining funds after the special needs individual passes.

The main benefit of using this type instead of a First-Party trust is that special needs individuals have no age limit on when they can open it.

There are complex tax implications for the distributions that the person with special needs draws from their Special Needs Trust, but those aren’t covered within this article. More info on taxation of distributions can be found here.

Key Takeaways

Those with special needs receive government benefits through Supplemental Security Income (SSI) and Medicaid only if they are disabled and have limited resources. Gifting them funds can cause them to lose these benefits because of getting pushed over financial limits.

Third Party Special Needs Trusts prevent this and are an excellent place for donations, life insurance payouts, and inheritance that the individual would’ve received. These trusts can be revocable or irrevocable and have no age or size limits.

First-Party Special Needs Trusts allow the special needs individual to put their assets into it directly. The special needs individual must be under 65 when it’s opened, and the trust must be irrevocable. The remaining funds at the death of the person with special needs are given to the state’s Medicaid division as reimbursement.

Nonprofit organizations establish pooled Special Needs Trusts. They can be used to open first-part or third-party trusts, must be irrevocable, and there are no age limits. Medicaid reimbursement policy is the same at the First-Party Special Needs Trusts.