Special needs trust: Protect your loved one’s caretaking and government benefits
Like other types of trust, a special needs trust includes a settlor (person who creates the trust, a trustee (person who manages the assets) and a beneficiary (person who receives the assets).
However, in the case of a special needs trust, also known as a supplemental needs trust, the beneficiary is someone who has a mental, physical or developmental disability.
Asset distribution in a special needs trust often has to be coordinated around any government benefits the disabled beneficiary receives.
There are several considerations when setting up this type of trust, which depend on your loved one’s specific situation. It helps to first understand the two types, which are based on the funding source.
Special needs trust types
Third-party: In this type, the trust is funded by assets that do not belong to the disabled beneficiary. For example, if you have a child with special needs and want to leave them an inheritance of money, property or other assets to help care for their needs after you’ve passed.
Self-settled: Also known as a first-party special needs trust, this type is funded by the disabled beneficiary’s own assets. One common example is lawsuit settlement funds from an accident that caused the disability.
Balancing assets with government benefits
Many people with physical, mental or developmental disabilities receive some form of government assistance to help care for their basic needs, such as supplemental security income (SSI) or Medicaid.
These government benefits feature eligibility requirements, including income and asset limits. If a disabled person owns too much, they can become disqualified for these programs and will no longer receive these necessary benefits.
This is why it’s important to consider transferring large assets – such as the inheritance and accident settlements noted above – into a special needs trust so that they are no longer owned by the disabled person.
Other key elements of a special needs trust
Exhaust government sources first: A special needs trust is designed to supplement government assistance. Given this, any needs that can be met through these public funds should be paid for with those sources first before getting distributions from the trust.
The trustee has full authority: On a day-to-day basis, the trustee uses the trust’s assets to fund necessities not covered by government benefits. Choice of the trustee is crucial, given that some distributions could potentially affect the disabled beneficiary’s government benefits.
Types of distributions allowed: The trustee can use trust funds to purchase necessities for the beneficiary, but these must be in the best interests of the disabled beneficiary, be fiscally prudent and meet other criteria. Some common examples include paying for a caregiver, medical and dental expenses, physical therapy, education and home furnishings. Large purchases such as a vehicle or a home for the beneficiary may also be allowed, but these need to be considered carefully against the criteria before purchasing.
Cash distributions: Cash is not typically considered a necessity, and direct cash payments from a special needs trust – even if they are used to buy other necessities such as food – run the risk of being considered income and impacting a disabled beneficiary’s government benefits.
Irrevocable: This type of trust cannot be dissolved or changed once it’s making distributions to the disabled person.
What happens after the beneficiary dies: If there are remaining assets in the special needs trust after the beneficiary passes, the type of trust will help determine what happens to these. If it’s self-settled and the beneficiary received Medicaid benefits, then due to Michigan’s estate recovery law, the beneficiary’s estate may be required to repay some or all of the benefits. If it’s a third-party, you can choose who receives the money when the beneficiary passes, which is another reason it’s better to plan.
Given its complexity and the government benefits that are at stake if it’s set up improperly, a special needs trust typically is created with the help of an estate planning attorney.
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Buzz Suuppi
Buzz started The Plan Firm for his family, which is everything to him. Every member of his team is committed to providing effective estate planning and related solutions for families in St. Clair County, Michigan.