Special Needs Trusts: Protecting Loved Ones Without Losing Benefits

Introduction: Planning Beyond Love and Care

Many families want to leave behind money for their loved ones, but what if that disqualifies them for critical government benefits? Special needs children need long-term financial support without jeopardizing SSI and Medicaid eligibility. A Special Needs Trust (SNT) is a solution that could be for you.

In this guide, we will go over how a Special Needs Trust works, how to set one up, and mistakes to avoid.

The Challenge: Why Traditional Inheritance Doesn’t Work

Supplemental Security Income (SSI) and Medicaid both have strict income and asset limits. If your loved one doesn’t meet the conditions, they won’t qualify for these government assistance program benefits. Unfortunately, if someone with disabilities receives an inheritance without a trust, it can push them over those limits and cause loss of benefits.

Let’s take a look at a common problem:

A well-intentioned parent leaves $100,000 to their child with disabilities. The child cannot qualify for SSI until the money is spent down, but they are not able to spend the money easily.

Good intentions aren’t enough when it comes to passing down your inheritance. You need the right legal structure to protect your loved ones, especially those with disabilities.

What Is a Special Needs Trust (SNT)?

A Special Needs Trust (SNT) is a legal arrangement that holds and manages assets for a person with disabilities without counting those assets toward benefit eligibility. It has a more specific purpose than a regular trust.

How does an SNT work

The trust owns the assets. Not you, not your beneficiary. You transfer your assets into the trust and designate the beneficiary or beneficiaries. Since the beneficiary is not the legal owner of these assets, they can remain eligible for government benefits like SSI and Medicaid.

A trustee manages the funds for the beneficiary’s benefit. The trustee can be another person or a financial institution.

Note that the funds in the SNT are used to improve quality of life and provide financial support. They’re not seeking to replace government aid. This is a major advantage of SNTs, since without a trust, your loved one might no longer be qualified for government aid after they inherit your money.

Special Needs Trusts can be useful for financially supporting needs that are not covered by public benefits, such as:

• Housing upgrades
• Education
• Companions
• Sitters
• Travel and leisure
• Therapy
• Dental and medical treatment not covered by Medicaid

Types of Special Needs Trusts

First-Party (Self-Settled) SNT

A first-party Special Needs Trust is also called a self-settled or (d)(4)(A) trust. It’s funded with the assets of the individual with a disability (like an inheritance, settlement, or backpay).

First-party SNTs have certain requirements. For example, federal law demands the trust be established when the beneficiary is under the age of 65. The first-party trust must be irrevocable, which means once you put your assets in, it becomes difficult to modify the trust. The irrevocable part of the trust is necessary in order to maintain eligibility for government benefits.

The first-party SNT also includes a “Medicaid payback” provision upon the beneficiary’s death or termination of the trust.

Third-Party SNT

A third-party SNT is funded by parents, grandparents, or others–not the beneficiary. Third-party trusts can be established to be revocable. This means the SNT can be modified if the grantor wishes, providing you with more flexibility and control over the trust. You could even dissolve the trust if circumstances change. However, third-party SNTs provide less asset protection and fewer long-term benefits.

There is no Medicaid payback required with third-party SNTs.

The third-party SNT can remain active for other family members even after the beneficiary passes away.

Pooled Trust

A pooled trust is a type of special needs trust that is managed by a nonprofit organization. It pools multiple beneficiaries’ funds for investment purposes. A pooled trust’s investments typically are low risk. Pooled trusts are stable because the family can review the trust’s performance and see whether the trustee should be replaced.

A pooled trust can be a useful option for families that want access to professional trustees. SNTs can be difficult or stressful for family members to manage. A financial expert can grow the trust more securely.

Pooled trusts alternatives include ABLE accounts.

Benefits of a Special Needs Trust

Preserves Eligibility for Government Benefits

The main benefit of a Special Needs Trust is that it preserves the beneficiary’s eligibility for government benefits. SNTs make it so that the assets inherited by the beneficiary that are placed within the trust will not count towards government program eligibility requirements. This is because the funds in the SNT are not counted as the beneficiary’s personal assets.

Provides Supplemental Support

The assets within a Special Needs Trust can help cover extra expenses byond what SSI or Medicaid can pay for. Examples include:

• Education
• Hobbies
• Travel
• Medical care

Offers Professional Management

You can pick a professional to be your trustee, such as a financial advisor or attorney, who can administer the trust expertly. The trustee can oversee the funds, preventing misuse and ensuring compliance with regulations. It could be more stressful for a family member to be the trustee, so professional management could help alleviate the stress.

Protects Against Financial Exploitation

The trust structure safeguards against fraud or mismanagement. You can always review the trust’s details to see whether it’s being well managed. If needed, you are typically able to replace the trustee.

Offers Peace of Mind for Families

Estate planning by setting up a trust is crucial for ensuring your loved one is cared for financially and legally even when you cannot be by their side anymore.

How to Set Up a Special Needs Trust

Consult an Experienced Attorney

Special needs trusts are complex and must follow specific federal and state laws.

LegalZoom can be a good starting point for basic trust planning before working with a specialist.

Choose a Trustee

The trustee can be a family member, professional fiduciary, or nonprofit organization. The main requirement is that the trustee needs to understand the benefit rules and have strong financial discipline. They should also be reliable.

Define the Beneficiary’s Needs

It can be a good idea to consider and list out what the beneficiary needs. This list is important for actually using the trust funds to help the beneficiary. Common needs include:

• Therapies
• Education
• Travel
• Personal care

Usually, the money in the fund is used to bridge the gaps in protection of government assistance programs, like SSI and Medicaid.

Fund the Trust

Don’t forget to actually fund the SNT. Parents can use savings, investments, or life insurance policies (via platforms like Ethos) to provide long-term funding. Life insurance is recommended even for the young and healthier because you never want an unexpected incident to leave your dependent unprotected.

Coordinate With Public Benefits

Ensure that the trust’s setup and distributions are made correctly to maintain eligibility for SSI and Medicaid.

The Role of Life Insurance in Special Needs Planning

Life insurance is an important part of protecting your special needs child. Parents or relatives of the special needs loved one can use the life insurance policy to fund an entire trust after their death.

How it works

The trust, not the child, is named as the beneficiary of the life insurance policy. That lets the life insurance payout leverage the advantages of using an SNT for your beneficiary. It ensures the financial support coming from the life insurance death claim will not disrupt the government program benefits.

Pro tip: Ethos makes it simple to get affordable life insurance coverage. You can even get coverage without going through medical exams. Life insurance payouts can help you fund your child’s trust securely.

Common Mistakes to Avoid

Leaving assets directly to the beneficiary

It’s common for parents and guardians to want to ensure their loved ones get the assets they are entitled to, especially if there is a distrust of trusts.

Failing to use a qualified attorney familiar with disability law

Disability laws, accommodations, and benefits can be frustrating at even the best of times. Hiring the expert help of a qualified attorney can help you prepare the various layers of protection for your loved one with a disability. Make sure the attorney is familiar with disability law, not only estate planning.

Attorneys may be out of many families’ budgets. Careful research and free consultations can still be valuable.

Appointing the wrong trustee

It’s important to choose a suitable trustee for the Special Needs Trust. The trustee cannot have poor management skills or a lack of understanding of the purpose of the SNT. The trustee can be anyone you place your confidence in, such as a family member or a financial representative. It can be tricky to change your trustee depending on how you set it up.

Forgetting to update the SNT

As major changes occur, it is good practice to review and update the trust as needed. Of course, this can be a challenge if you set up an irrevocable trust. Consult with an attorney or estate planner to determine whether an irrevocable or revocable trust is better for your situation.

Not communicating the plan to other family members

It’s understandable to struggle with the talk about trusts with your other family members. Often, the special needs child cannot understand how a trust works and why it is necessary. But you can still talk with other family members so that there are fewer surprises.

Maintaining and Reviewing the Trust

Annual check-ins: Ensure the trustee is managing funds in compliance with benefit rules.

Even if there are no major life or financial changes, it is still a good idea to check in with your trust’s status and performance once a year. The habit of doing an annual review habit ensures if there is an issue, you can catch it earlier.

Update when necessary

Life can change. You might gain new assets or your beneficiary might have changes in care. Legal updates can also impact your trust.

Depending on how you set up your trust, it could be irrevocable. In this case, it would be harder to modify your trust, but it is still possible.

Communicate with caregivers

Your loved one’s caregivers, sitters, and anyone else involved should understand how and when the trust funds can be used. Be clear when creating the trust about its purpose and guidelines so that you reduce the chance of trust funds misuse.

Conclusion: Empowering, Not Limiting

A Special Needs Trust ensures your loved one’s future is secure. You want to protect them financially, emotionally, and legally, and an SNT can be great. However, because of the various types and requirements of SNTs, it is necessary to carefully prepare and setup the trust. Consult with a financial advisor or attorney familiar with disability laws.

Hard as it can be to start, we encourage you to begin planning today. Even a small trust can make a big difference. LegalZoom is a valuable online tool that lets you create a valid trust for your loved one with a disability.