The law allows for the establishment of trusts to protect assets, designate their use and, in some cases, avoid estate and inheritance taxes.
Trusts can also be used to hold assets so they do not disqualify the beneficiary from receiving means-tested public benefits like Medicaid or Social Security disability.
What You Need to Know About This Special Estate Planning Measure for Persons With Disabilities
A special needs trust is a trust for disabled persons that preserves the beneficiary’s maximum eligibility for government benefits.
These benefits may include Social Security disability benefits, also known as Supplemental Security Income or SSI, as well as Medicare and Medicaid.
The funds placed in a special needs trust (SNT), when properly used, generally do not count as assets or income for the purposes of determining public assistance eligibility.
According to M&L Special Needs Planning, nearly 54 million Americans have physical, sensory or intellectual disabilities, highlighting the need for advance planning measures like special needs trusts.
Advantages of a Special Needs Trust
- Does not prevent beneficiary from qualifying for asset or income-restricted government benefits
- Can be used to cover needs not covered by public assistance
- If set up as an irrevocable trust, it cannot be seized by creditors or by those who sue
- May shield funds from inheritance or estate taxes
- Allows trustee to designate funds for specific purposes
What Can Special Needs Trust Funds Pay For?
The purpose of the funds in a special needs trust is to pay for expenses that government assistance doesn’t cover.
These expenses may include things like :
- Caretaker and companion costs
- Transportation and travel
- Medical and dental expenses not covered by Medicaid or Medicare
- Special medical equipment like wheelchairs and mobility devices
- Education or training
There was originally a stipulation known as the sole benefit rule mandating that trust funds could only be spent on goods and services solely benefitting the beneficiary.
This rule was relaxed to allow special needs trust assets to pay for things like companion compensation, shared assets like televisions, cars or homes and incidental expenses for caretakers.
What Special Needs Trust Funds Cannot Be Used For
Forbidden distributions from a special needs trust include expenses that Medicaid or SSI are intended to cover.
That means the funds from a special needs trust should never be used to pay for covered medical expenses, food or shelter. This includes things like rent, mortgage, and utilities payments.
Cash disbursements directly to the beneficiary are also forbidden.
Failure to distribute special needs trust funds correctly can result in the reduction or loss of Medicaid and SSI benefits.
Who Can Be the Beneficiary of a Special Needs Trust?
Special needs trusts may be established for the benefit of a physically or mentally disabled person, and they may also be used for persons who are chronically ill.
The disabled beneficiary must be under the age of 65 at the time the trust is established, but the trust can continue to benefit the special needs beneficiary beyond age 65.
Special needs trusts are often set up by parents or grandparents to ensure the continuing welfare of children with special needs or disabilities.
They can also be established by legal guardians for the benefit of dependents who have special needs.
Types of Special Needs Trusts
There are two main types of special needs trusts: first-party and third-party special needs trusts.
A first-party SNT, also known as a d4A trust or self-settled trust, is funded with assets that belong to the beneficiary.
First-party SNTs are commonly used to protect assets and benefits when a disabled person inherits money or wins a legal settlement. The trust allows them to continue receiving public benefits despite the new windfall.
First-party special needs trusts can also be used by those who are newly disabled in order to qualify for public disability benefits.
A third-party SNT is funded by assets that come from others.
This type of trust is also known as a supplemental needs trust, as it is commonly used, as the name suggests, to help pay for the trust beneficiary’s supplemental needs.
Both types of trusts allow the assets held within them to pay for uncovered expenses and for certain expenditures that improve the beneficiary’s quality of life.
An important difference between first-party trusts and third-party trusts for special needs is the Medicaid payback provision that applies after the beneficiary’s death.
Third-party SNTs allow for the deceased’s trust fund assets to pass directly on to designated remainder beneficiaries—often other family members, inheritors or charities.
In contrast, any assets remaining in a first-party trust after the beneficiary’s death must usually be used to pay back Medicaid first.
What Types of Assets Can Be Used to Fund a Special Needs Trust?
People choose to fund SNTs using a variety of different assets.
Common funding sources for special needs trusts include:
- Life insurance policies
- Retirement benefits, including IRAs and 401k plans
- Proceeds from legal settlements such as personal injury awards
- Personal property
- Real estate holdings
Almost any type of property can be held in a special needs trust, but since the value will need to be accessed to pay for things, it is usually better to fund it using sources that are easily convertible to cash.
How to Set Up a Special Needs Trust
It is possible to set up a special needs trust without a lawyer, but it is not recommended for most people.
Given the complexity of the rules regarding special needs trusts and the importance of getting every detail right, it is a good idea to work with a lawyer experienced in special needs trusts.
An attorney who specializes in estate and special needs planning will be able to help you figure out the right kind of SNT for your situation and set it up in the most advantageous way.
They can advise you on choosing trustees, suggest ways to fund your special needs trust and discuss whether a revocable or irrevocable trust might be best.
An experienced special needs planning attorney can also help you choose between creating a testamentary trust, which is established upon your death, and an inter vivos trust that operates during your lifetime.
How Much Does It Cost to Set Up a Special Needs Trust?
The estimated cost for setting up a special needs trust in Georgia usually runs somewhere between $2000 to $3000 dollars.
Your actual cost may be more or less, depending on factors like the size and type of the trust, the types of assets in it, and the complexity of the agreement.
There are also fees associated with administering the trust, including compensation and expenses for the trustee.
The good news is that a properly drafted special needs trust can save you quite a lot of money by allowing your loved one to qualify for government disability benefits.
It may also save your family money in taxes, both now and in the future.
A good estate planning attorney can discuss the costs and benefits of a special needs trust and advise you on all your options.
Frequently Asked Questions About Special Needs Trusts
Can my special needs trust be used to pay for utilities?
Yes and no. Technically, the trustee can take money from it for this purpose, but using money from a special needs trust for utilities will usually result in a reduction of public benefits.
There may be circumstances where paying for utilities out of a special needs trust makes sense, but you should always seek the guidance of an attorney before using funds to pay for anything government benefits are supposed to cover.
How much money should I put into a special needs trust?
The answer to this is complicated and will depend upon your particular situation. Factors influencing how much money a special needs trust should have include the cost of care, housing, uncovered medical and other expenses, as well as how much public assistance is being received.
Another consideration to take into account is whether any unused funds in the account will be subject to the Medicaid payback requirement. Most third-party SNTs are not subject to this, but first-party SNTs are.
What is a d4c trust?
A d4c trust, also known as a pooled trust, is a trust administered by a non-profit organization for the benefit of multiple individuals.
This arrangement can save on administrative costs and give families the benefit of a professional trustee.
Each individual in the trust will have an individual account with funds to be used for his or her sole benefit, and participants must be disabled to qualify.
This type of SNT can also be beneficial for those who do not qualify for other types of special needs trusts, including those who are over 65 years of age.
Drawbacks of pooled trusts include potential state penalty charges for those over 65 and Medicaid payback requirements.
Rules for special needs trusts, including pooled trusts, vary by state and by type, so consult an attorney about the pros, cons and eligibility requirements of each.
Want to find out more about special needs trusts and how they can benefit your loved one? We can help.
Schedule a consultation with the special needs and estate planning experts at Speights Law to find out everything you need to know. We can discuss your family’s needs and wishes, answer your questions and help you assess all your options.
Archie Speights is a co-founder and lead criminal law attorney of Speights Law in Cherokee County. He is an experienced criminal defense lawyer who handles an assortment of major felony cases, including murder, sex crimes, aggravated assault, and drug crimes in the state of Georgia. To contact Archie, please visit our contact page.