A special needs trust is an important component in estate planning for many families with a member who has special needs or a disability.
This type of trust is designed to provide financial support to a beneficiary without jeopardizing their eligibility for needs-based programs. Understanding how a special needs trust works is essential for anyone planning an estate that includes a beneficiary who has special needs.
Benefits of a special needs trust
The primary function of a special needs trust is to hold assets for the benefit of an individual who has disabilities while allowing them to receive additional financial support while still maintaining their eligibility for public assistance benefits like Medicaid or Supplemental Security Income. A special needs trust circumvents this issue by ensuring that the assets in the trust are not counted as part of the beneficiary’s personal assets.
Management and distribution of funds
A special needs trust is managed by a trustee, who is responsible for distributing funds to support the beneficiary’s needs without directly providing them with cash or assets that could affect their benefit eligibility. The trustee can pay for various life-enhancing expenses, such as education, therapy, personal care attendants and recreation. The trust funds aren’t intended to cover basic needs typically covered by public assistance, like food and housing.
Types of special needs trusts
There are two main types of special needs trusts: first-party and third-party. A first-party special needs trust is funded with the beneficiary’s assets, often received from an inheritance, legal settlement, or insurance payout. A third-party special needs trust is funded with assets from someone other than the beneficiary, typically a parent or other family member.
After the beneficiary’s death
Another critical aspect of a special needs trust is its provisions for what happens to remaining assets after the beneficiary’s death. For first-party trusts, any remaining assets are typically required to be used to reimburse the government for the cost of medical care provided to the beneficiary. In the case of third-party trusts, any remaining assets can be directed to other beneficiaries as specified in the trust.
These trusts require very specific wording and terms, so seeking legal guidance is critical for anyone considering this option.