special needs trustLet’s face it, none of us likes to think about death and dying, but I think we can agree that we should plan for the inevitable. If you have a child with a disability, the need to plan for the future becomes even more critical. The time to plan is now, because your child could be at risk if you die unexpectedly or even become debilitated due to an illness or injury. A carefully written plan gives you, your family, your friends, and your child—everyone—peace of mind.

Your First Step

Many disabled individuals are helped by government assistance programs (including programs for low-income families like Supplemental Security Income and Medicaid,) which are a godsend for many families. However, leaving assets to a physically or mentally disabled or chronically ill person through a typical will or trust could jeopardize their access to these government benefits. With the help of an attorney, you can establish a special needs trust (SNT) to protect your disabled child’s benefits. Therefore, your first step should be to enlist the help of an experienced special needs lawyer. A quick Google search will help you find a list of attorneys near where you live who have the right background and experience. “Planning early may seem expensive upfront but will save a lot of money in the long run,” the Special Needs Alliance says.

What is a Special Needs Trust?

Special needs trusts are legal arrangements designed specifically for disabled or mentally ill beneficiaries. The money in a special needs trust will not jeopardize your child’s eligibility for public assistance provided that the trust money only covers financial needs that aren't covered by government funds. The money from an SNT cannot be used to pay food or housing expenditures, instead, it is used to pay expenses like out-of-pocket medical expenses, transportation costs, and for the services of caregivers. The special needs trust must be irrevocable, meaning it cannot be changed or terminated without permission from the trust’s beneficiary. The assets in an SNT can't be seized by creditors or by someone who wins a lawsuit.

There are two kinds of special needs trusts.

A first-party SNT is one that is funded by income or assets which belong to the disabled individual.  Commonly known as a “self-settled” trust, the funding for a first-party SNT comes from a personal injury settlement or an inheritance the beneficiary receives directly. For this type of trust not to count for Medicaid or SSI purposes, federal law states that the beneficiary (your disabled child) must be under the age of 65 when the trust is created. A first-party trust must pay back Medicaid upon the termination of the trust or the death of the beneficiary, whichever happens first.

The second version is a third-party SNT. This kind of trust is sometimes referred to as a “supplemental needs” trust. It is funded with money or other assets belonging to someone other than the beneficiary. Absolutely no funds belonging to the beneficiary can be used to fund a third-party trust. Common funding sources may be inheritances from parents or grandparents, gifts, or payouts of life insurance policies. Medicaid does not have to be paid back with a third-party trust. When the beneficiary dies, the trustee decides how the remainder of the assets in the trust are distributed. Because the beneficiary does not own the assets in the trust, they can remain eligible for benefit programs that have asset limits such as SSI and Medicaid. Generally, the third-party SNT does not replace the beneficiary’s government benefits but adds to them.

Choosing a trustee is a key decision.

“When you create a special needs trust for a loved one, you will probably name yourself as trustee to manage trust while you are alive,” observes nolo.com. “But who will take over the trust when you are no longer around to make sure that things go right? Picking reliable people to manage the trust is crucial because trusts operate pretty much on the honor system. It's true that the law imposes a duty on trustees to honestly and faithfully carry out the trust's terms, but in most cases, there is no court supervision.”

Trustworthy.com advises that “because of the everyday pressures that all families face, someone in your family may regard the funds in the special needs trust as their money rather than your special needs child's money. This can be dangerous, especially if your child's eligibility for public benefits is at stake. In most families, choosing an impartial, non-family person to serve as your special needs trustee is a good idea.” Look for an honest and honorable trustee who will make decisions based solely on the needs of your child. Some possible trustees could be:

  • Your attorney, 
  • A trusted financial institution, or
  • A non-profit organization—particularly one with special needs experience. 

The ideal trustee should care about the beneficiary, be fiscally responsible, and be able to understand the laws governing SSI, Medicaid, and other government programs. “It is especially important that the SNT’s trustee be willing to serve,” nolo.com suggests. “Before you name your trustees in the trust, make sure they accept the role you assign to them. Otherwise, when it comes time for them to serve, they might decline.” Clearly explain to potential trustees what would be expected of them and you may want to give them a letter describing their duties. Try to choose a trustee that is about the same age as your special needs child so they likely will be around as long as the beneficiary of the trust.

Sean D. Cuddigan
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SSA and VA Disability Attorney in Omaha, Nebraska