Understanding Special Needs Trusts: Protecting Your Loved One’s Financial Future

Families with individuals that have special needs face a variety of unique challenges. Making decisions regarding their loved one’s well-being is tricky enough without throwing government benefit programs and their eligibility requirements into the mix.

Special needs trusts can make it easier for your loved ones to get the support they need while not jeopardizing their eligibility for essential government benefits.

Today we’re diving into special needs trusts – what they are, how they work, and how to get one started.

What Is a Special Needs Trust?

A Special Needs Trust, or a Supplemental Needs Trust, is a legal arrangement designed to manage and protect the assets and financial resources of an individual with special needs or disabilities.  

The primary purpose of a Special Needs Trust is to improve the quality of life for the beneficiary without jeopardizing their eligibility for government benefits and assistance programs.  

How does it do that? Keeping an individual’s assets separate from the trust beneficiary’s direct control. 

Other purposes of Special Needs Trusts are to supplement government assistance and provide support to cover all of the extra expenses an individual with special needs may have, and appoint a person or entity to manage the trust assets and make decisions on behalf of the beneficiary in their best interest.

Overall, a Special Needs Trust offers peace of mind to families and caregivers because they can be confident that their loved one with special needs will have financial support and a better quality of life with still receiving benefits from essential government assistance programs.

Types of Special Needs Trusts

Let’s dive into the different types of Special Needs Trusts.

First is the first-party or self-settled special needs trust. This type of trust is established using the assets of the individual with special needs. These assets can come from personal injury settlements, inheritance, or any other funds belonging to the beneficiary. 

There are some specific rules and requirements that apply to first-party trusts:

• The trust must be created for the sole benefit of the individual with special needs, and they must be the trust’s beneficiary.
• Generally, first-party trusts are available to individuals with disabilities that are under the age of 65.
• Must follow the “payback provision.” When the trust beneficiary passes away, any funds remaining in the trust must be used to reimburse the state for Medicaid benefits received by the beneficiary during their lifetime. 
• The trust must be managed by a trustee responsible for investing and distributing the assets per the trust’s terms. 

The second type of trust is a third-party special needs trust. This type of trust is what you think of when you think about trust. Third-party trusts are established by someone other than the beneficiary (the individual with special needs) to provide for their supplemental needs while preserving their eligibility for government benefits. The trust is also funded with assets belonging to someone else, such as the parent, grandparent, sibling, or other beneficiary family member.

Here are some further details about third-party trusts:

• There is no payback provision – Unlike first-party trusts, when the beneficiary passes away, the grantor (creator of the trust) can specify how they want the funds to be distributed. 
• They offer more flexibility and control for the grantor compared to first-party trusts. The grantor can decide how the trust assets should be managed and distributed and also name contingent beneficiaries to receive the remaining funds after the initial beneficiary’s death.
• They can be set up as either revocable (can be modified, amended, or revoked) or irrevocable (cannot be easily changed once the trust is established. 

Lastly, let’s look at Pooled Special Needs Trusts. This type of trust allows individuals with disabilities (or their family members) to pool their assets together for investment purposes while maintaining separate accounts for each beneficiary. Nonprofit organizations manage them, and just like the others, are designed to provide supplemental income without jeopardizing the beneficiary’s ability to qualify for government benefits. 

Here are some further details about how pooled trusts work:

• They may include a payback provision. Whether or not a payback provision is required depends on the state laws and whether the trust is funded with the beneficiary’s assets or third-party contributions. 
• They can be advantageous for individuals with disabilities who do not have sufficient assets to establish their needs and trust. Since the assets are pooled, beneficiaries can access professional management and investment opportunities with smaller contributions.
• They are regulated by state and federal laws meaning each state may have specific requirements and regulations on their establishment and administration.

Establishing a Special Needs Trust

Now that you know the different types of special needs trusts, let’s walk through how to establish a trust.

1. Select the type of trust: Decide whether a first-party, third-party, or pooled trust is most appropriate, depending on the needs and financial situation of the beneficiary and their family members. 
2. Selecting a trustee: Choose a trustee who is competent, trustworthy, and capable of managing the trust and making decisions regarding distributions for the beneficiary in their best interest. The trustee can be a family member, a professional trustee, or a corporate trustee.
3. Creating the trust document: Work with an attorney to create a comprehensive trust document that clearly outlines the terms and conditions of the trust. Be sure to include the names of the individuals creating (granting) the trust, the trustee, and the beneficiary.
4. Fund the trust: If it’s a third-party trust, the grantor(s) will contribute assets to the trust during their lifetime or through their estate plan. If it’s a first-party trust, the beneficiary’s assets will be transferred into the trust.
5. Monitor and update as needed: Regularly review the trust to ensure it continues to meet the beneficiary’s needs and that any changes in laws or circumstances are addressed and amended if necessary.

Collaborating with Government Benefit Programs

Much of the talk surrounding special needs trusts has surrounded how their primary purpose is to provide the beneficiary with additional funds without jeopardizing their eligibility for government benefits. But how exactly does this work?

1. Understand government benefit programs: It’s critical to familiarize yourself with the specific government benefit programs the beneficiary is receiving or eligible for. Examples include Medicaid, Supplemental Security Income, housing assistance, and vocational rehabilitation services. 
2. Notify government benefits administrators: Once a special needs trust has been established, inform the relevant government benefits administrators about the existence of the trust and provide them with any documentation they may need. 
3. Maintain Supplemental Trust Distributions: Ensure that the trustee understands the ultimate purpose behind the trust and that distributions made supplement, not replace, government benefits. For example, distributions could be used to cover expenses like education, medical care not covered by benefits, transportation, therapies, and recreation, all designed to enhance the beneficiary’s quality of life. 
4. Avoid countable income and assets: Trust distributions must be made for qualified expenses that don’t count as income for benefit eligibility. 
5. Periodic reporting and reviews: Keep thorough records of trust distributions and expenses to facilitate reporting and reviews. 
6. Communicate with government administrators: Establish clear and open communication with administrators, provide documentation, and answer any questions regarding the trust and its distributions.

Government benefits often have strict income and asset limits. So, if a person with disabilities receives a lump sum of money or inherits assets outright, they may lose eligibility for those critical benefits. Follow the above steps to ensure your loved one gets assistance from the government and supplemental benefits through the trust.

Planning For The Future

Succession planning for a special needs trust involves making arrangements for the trust’s management after the original grantor passes away or can no longer act as trustee. A solid succession plan ensures that the trust’s mission remains fulfilled. 

Here are a few steps to establishing a succession plan:

1. Choose a successor trustee: Like the original trustee; the successor should be capable, trustworthy, and knowledgeable about the beneficiary’s needs. 
2. Establish clear instructions: Document instructions and guidelines for the successor trustee. Be sure to include things like the beneficiary’s needs or preferences and any specific requirements or limitations related to the trust. 
3. Communicate with family members and caregivers: Inform any relevant individuals about the trust and the succession plan in place. Ensure everyone knows their roles and how to support the beneficiary and successor trustee. 
4. Ensure continuity of care: Make arrangements for the beneficiary, even if the original trustee is no longer involved. 
5. Consider adding a trust protector: This is a third-party individual or entity with the authority to oversee the trustee’s actions and ensure the trust’s goals are fulfilled.
6. Review and update the trust document: It’s critical to review the trust to ensure it remains current regularly and reflects the beneficiary’s needs. 

In addition, you can also include a special needs trust within your estate plan. To do this, ensure that your will, living trust, and other estate planning documents are consistent with the guidelines set within the special needs trust. Additionally, avoid leaving assets directly to the beneficiary because it can affect their eligibility for certain government benefits. 

Seeking Professional Guidance

If this blog has made one thing clear, special needs trusts can be complicated. That’s why consulting with an experienced attorney specializing in special needs trusts and estate planning is essential to ensure that all your documents are legally valid and meet the beneficiary’s needs. 

Working with someone that understands families with special needs is essential. TFS Advisors are experts in inclusive financial planning. Our very own Aaron Terwedo is an excellent personal resource in addition to financial. He’s passionate about working with families with special needs because they’re a community of vibrant and diverse people. 

Aaron has children with special needs, so he knows that families that special needs families can sometimes feel as if they’re alone. But it isn’t true! Connecting with other families can be helpful in terms of emotional support and support in tangible areas like navigating government benefits or financial planning. 

No family should have to choose between their financial stability and the needs of their family. A solid financial plan can relieve stress so you can focus more on your loved one’s well-being. 

If you have questions regarding special needs trusts or inclusive financial planning, please reach out to us today. We look forward to meeting you and your family and creating a financial plan that serves you and your goals.