Parents and guardians of individuals with an intellectual or developmental disability (IDD) should consider establishing a special needs trust, also sometimes referred to as a supplemental needs trust. Of course, this is something that must be discussed with a qualified financial planner or estate planner. If you haven’t heard much about special needs trusts, here’s some basic information about them to help you decide if it’s something you should look further into.
Key Points About Special Needs Trusts
- Special needs trusts are a legal structure for holding and protecting assets for a person with a chronic illness or disability.
- They’re a secure way to provide for a love one’s expenses, including after your death.
- These trusts typically involve three parties: one who establishes the trust, the beneficiary who receives payments from it, and the trustee who is named to manage it and oversee the disbursement of funds. A successor trustee should also be named.
- Having a trustee is a major advantage for people who aren’t able to manage their finances independently.
- Many special needs trusts are created as part of a larger estate planning effort. They’re also commonly established to hold money or assets won in a lawsuit, especially if the beneficiary is a minor. They are also sometimes created during the divorce of a disabled person’s parents or guardians.
- Special needs trusts can collect assets from a variety of sources, like contributions from family members, life insurance proceeds, and inheritances.
- As long as the money from a special needs trust is used for essential expenses, the income does not count against eligibility for public assistance and disability benefits, such as those from Social Security, Supplemental Security Income (SSI), Medicare or Medicaid, and many other programs that require a person’s income to be below a certain level to receive benefits.
- “Essential expenses” from the above point generally include things like food, shelter, medical expenses, transportation costs, and payments for a caretaker.
- Maintaining financial eligibility for public assistance is a primary reason for creating a special needs trust. If the same money or assets were bequeathed as an inheritance in a will, for example, it would count against the beneficiary’s ability to qualify for aid.
- These trusts can also be used to hold child support payments and remove them from consideration as to whether a child with an IDD qualifies for government aid.
- The person who established the trust can stipulate what the money is used for.
- Assets held in a special needs trust cannot be seized by creditors or the winner of a lawsuit.
- Special needs trusts must be created before the beneficiary turns 65 years old.
- There are three types of special needs trusts, each with its own funding sources and rules. First-party special needs trusts are created with assets owned by the beneficiary (from an inheritance, lawsuit, etc.). Third-party special needs trusts are funded by assets belonging to someone besides the beneficiary (typically their parents or guardians). Pooled special needs trusts are for families with more modest assets or who don’t have a trustee; they’re usually administered by a nonprofit organization that pools assets from multiple beneficiaries.
- It’s important to work with a qualified financial adviser or attorney when setting up a special needs trust.