While it’s hard to imagine a future where our children must live without us, it’s a reality that every parent needs to plan for. And when you’re caring for a child with disabilities, it takes a few extra steps to build them a more secure financial future without jeopardizing their government benefits. The good news is that specific financial planning tools and strategies are designed to help families care for their loved ones with special needs now and well into the future.
Let’s consider one common estate planning strategy you and your family may want to consider.
What Are Special Needs Trusts?
A Special Needs Trust (SNT) is a trust designed to hold and manage assets for a person with disabilities. As with other types of trusts, the assets held by the trust are separated from the individual’s estate, which helps protect assets from creditors and limits access to the designated beneficiary.
There are two types of SNTs: first-party SNTs and third-party SNTs.
First-party SNTs are established by an individual with a qualifying disability (which is determined by the Social Security Administration). The grantor (meaning the person who opens the trust) must be under 65 to do so. Once established, the trust is then funded with the grantor’s assets. In the case of a first-party SNT, the grantor and the beneficiary are the same person (the individual with a qualifying disability).
A third-party SNT resembles a traditional trust funded by a person or people other than the beneficiary. Third-party SNTs can be established in a few ways, either as revocable or irrevocable trusts. In addition, the trust may be stand-alone or testamentary. The beneficiary may access the assets held in a stand-alone trust while the grantor is still alive. On the other hand, a testamentary trust is typically used for estate planning purposes. The trust would not be funded with the grantor’s assets until he or she passed away, meaning the beneficiary would not benefit immediately from the trust.
The Benefits of Special Needs Trusts
Some government benefit programs, like SSI and Medicaid, will base eligibility or benefit amounts on a disabled individual’s current income, assets, or net worth. The same goes for specific state or non-profit programs.
Say you and your spouse passed away tomorrow, and your child inherited everything. They would no longer be eligible for government benefits or assistance because their net worth is too high—even though what they inherit may not be enough to cover their lifetime care expenses or necessities.
However, there are specific strategies families can take, such as leveraging a special needs trust, to help ensure their child receives their inheritance without becoming disqualified from receiving critical benefits.
The assets in an SNT do not count toward the beneficiary’s total income or net worth, so it’s commonly used to help families protect their children’s financial futures.
The funds in an SNT are relatively flexible. They’re meant to help cover expenses other benefit programs or income won’t pay for (or won’t pay the total amount for). They can be used for transportation, medical expenses, in-home care, and other related costs.
How to Establish a Special Needs Trust
Establishing a special needs trust is similar to establishing other types of trust, so you’ll likely want to consult with an experienced attorney who can guide you through the process.
Generally speaking, here are the steps your family will need to take to create an SNT:
- Choose your beneficiary: This will likely be your child with disabilities.
- Select a trustee: Decide carefully who will manage the account, as it should be someone responsible and committed to your child’s long-term well-being. You may also want to select a successor trustee who would take over if your original trustee dies or becomes incapacitated. The grantor will usually name themselves the trustee, though you don’t have to.
- Create and sign trust documents: Again, it’s recommended that you work with an attorney to create a trust. When the documents are completed, you’ll need to sign them, typically with a few witnesses and a notary (but it varies by state).
- Fund your trust: Once it is established, you can fund it.
Funding a Special Needs Trust
You can fund your SNT with any type of asset—cash, collectibles, real estate, stocks and bonds, or other personal items. However, you must ensure the asset’s title is transferred correctly with certain assets, primarily property. Unless the title is successfully transferred over, the government may not view it as belonging to the trust—and your beneficiary could risk losing benefits.
Depending on whether the trust is revocable or irrevocable, grantors may benefit from certain estate tax advantages of transferring assets over to the trust—particularly if they have a sizable estate that exceeds the federal or state estate tax exemption limits.
Common Misconceptions About SNTs
One of the biggest misconceptions about SNTs is that trusts are only for ultra-wealthy families with complex assets. If your child is set to inherit even a few thousand dollars, the difference in income could impact their eligibility requirements.
Another important note regarding SNTs is the payout process—specifically, the Medicaid payback provision. The Medicaid payback provision only applies to the 1st party special needs trust. If funds are held in a 3rd party SNT and the original beneficiary passes away, another sibling can inherit any remaining funds.
Beyond managing money, a trust can also help you prepare for your child’s future when you’re gone. You can help determine when money is distributed, who will help care for the funds, and more.
Consult a Professional
As we mentioned, trusts are complex, legally binding documents that are best addressed with the help of an estate planning attorney. However, you should also work with your financial advisor to build and execute a plan for funding the trust in a way that benefits your family today and your child in the future.
If you have questions about special needs trusts or would like to learn more about creating one, don’t hesitate to reach out to our team today.
