A special needs trust (also known as a supplemental needs trust) is a legal plan for placing funds and other assets in the control of a trustee for the benefit of a disabled child. Such trusts are drafted so that the funds are not considered to belong to your child in determining his or her eligibility for public benefits. A special needs trust makes it possible for your child to receive the advantage of extra income without losing valuable state and federal benefits. The funds held in a special needs trust may be used to purchase items and services that government benefits do not provide. These include medical and dental expenses, eye glasses, transportation, education, maintenance, recreation, vacations, special therapies, and paid staff or companions. The trust may also provide for personal items such as furniture, a television, a computer, software, music player and sports equipment.
WHY CREATE A SPECIAL NEEDS TRUST?
In many cases, money should not go outright to a disabled child, both because he or she may not be able to manage it properly and because receiving funds may jeopardize his or her eligibility for public benefits. Most public benefit programs, such as Supplemental Security Income (SSI) and MassHealth, require a disabled individual to be of limited means in order for the state to assume the financial cost of supporting the disabled individual. For example, an applicant for SSI can only have $2,000 in his or her own name in order to qualify for benefits. If a disabled child is left an outright gift, either by will or through the intestate laws, he or she would lose eligibility for SSI and MassHealth until the funds are spent down to the allowable limit. These programs are often a gateway for receiving other vital community support services, which would be lost as well.
While it is important that you do not leave property directly to a child with a disability, some parents choose to disinherit a disabled child because the child’s needs would be taken care of by the state. This is not a recommended strategy. Government benefits are uncertain and there is no guarantee that they will be adequately funded or available in the future. In addition, most public benefits merely provide basic support. They do not provide for many of the comforts and luxuries which enhance a disabled child’s quality of life. Other parents sometimes wish to leave funds to their other children with the understanding that they will provide for their disabled brother or sister. Sometimes this plan works effectively. However, the siblings are not under any legal obligation to use the money for this purpose. Also, it is difficult to predict the future. This money could be subject to your other children’s creditors, divorce, business failures, or lawsuits. If your non-disabled child predeceases your disabled child, the funds would become part of your non-disabled child’s estate and likely pass to his or her spouse or children. Thus, the money that you had intended to provide for your disabled child may not be used as you had wished. Creating a special needs trust will ensure that your assets are used as you intended.
USE OF TRUST ASSETS
The assets in a special needs trust are intended to enhance a disabled child’s quality of life, not provide basic support. The funds can be used to pay for comforts and luxuries that are not paid for by public assistance funds. If money from the trust is used for food or shelter costs on a regular basis or distributed directly to a disabled child, such payments will count as income to the child and can affect eligibility for government benefits like SSI and MassHealth. For instance, income paid from a special needs trust directly to your child will reduce SSI benefits by one dollar for every dollar paid to him or her. In addition, payments by the trust to your child for food or housing are considered “in kind” income and, again, your child’s SSI benefits will be cut by one dollar for every dollar of “in kind” income.
The trustee can, however, use trust funds for food and shelter if the trustee decides that doing so is in your child’s best interest despite a possible loss or reduction in public assistance. Further, if your child does not receive any public benefits at a particular time, the trust assets could be used for your child’s day-to-day needs. One of the trustee’s most important jobs is to use discretion in making distributions from the trust so as not to jeopardize your child’s eligibility for these government benefits.
TYPES OF SPECIAL NEEDS TRUSTS
There are three main types of special needs trusts: the self-settled trust, the third party trust and the pooled trust. A self-settled special needs trust holds assets that belong to the individual with special needs, such as an inheritance or a personal injury settlement. A third party special needs trusts holds funds belonging to someone other than the individual with a disability, such as a parent or grandparent. That person leaves his or her own property to a third party trust to benefit the individual with special needs. A third party trust can be created during that person’s lifetime or at death under a will. A pooled trust holds funds from many different individuals with special needs. A pooled trust may be an option where there is no trusted friend or family member available to act as trustee or there are not enough funds to attract a corporate or professional trustee. A pooled trust is essentially set up by a charity and allows beneficiaries to pool their resources for investment purposes, while still maintaining separate accounts for each beneficiaries needs.
A primary difference between these types of trusts is what happens to any property that is left in the trust when the disabled individual dies. Most self-settled trusts require that any remaining funds must be used to reimburse the state for MassHealth benefits provided on behalf of the disabled individual. On the other hand, funds remaining in a third party trust typically will pass to whoever the parent chooses to receive the funds after the disabled child’s death. Alternatively, the parent can let the disabled child direct who will receive the unspent funds in his or her own will. One exception to this involves a parent who needs nursing home care but cannot qualify financially for MassHealth benefits because he or she has too many assets. In that case, the parent can transfer his or her excess assets without penalty to a third party trust for a disabled child. The trust benefits the child not the parent. When the child dies, any remaining funds must be used to reimburse the state for the child’s (not the parent’s) MassHealth costs. Assets remaining in a pooled trust funded by a third party can pass to the beneficiary’s family members. Pooled trusts which contain funds that belonged to a disabled person are used to reimburse the state for that person’s care after a portion of the funds are retained by the non-profit organization responsible for managing the trust to assist other members.
FUNDING A SPECIAL NEEDS TRUST
A special needs trust can be funded during your lifetime or on your death. The trust can be funded with case, securities, life insurance or other resources. Often, a second-to-die life insurance policy (payable only when the second of the two parents passes away) offers an affordable option without depleting assets required for other family and household needs.
Some people want to fund a special needs trust as a vehicle for saving money for a disabled child. Grandparents or other family members may want to contribute by making gifts or naming the trust as a beneficiary of their estate. There are some drawbacks to funding a trust during your lifetime. A funded special need trust should be irrevocable. This means that after the funds have been transferred into trust, you cannot make any changes to the trust document, even if your circumstances change. You would not be able to change your mind, revoke the trust and take your money back. There are also tax implications for funding a special needs trust during your lifetime. The trust must file its own separate tax returns each year. In addition, the trust income is taxed at a higher tax rate than for an individual.
CHOOSING A TRUSTEE
Choosing a trustee is one of the most important and difficult issues in special needs trusts. The trustee must have the necessary expertise to manage the trust, including making proper investments, paying bills, keeping accounts, and preparing tax returns. A professional trustee will have these skills, but may be unfamiliar with the beneficiary and his unique needs. For those who may be uncomfortable with the idea of an outsider managing their child’s affairs, it is possible to simultaneously appoint both a professional trustee and a family member as co-trustees. It’s also possible to hire a trust “protector,” who has the power to review accounts and to hire and fire trustees, and a trust “advisor,” who instructs the trustee on the beneficiary’s needs. However, if the trust fund is small, a professional trustee may not be willing to serve. Make sure that whomever you choose is financially savvy, well-organized, and, most important, ethical. It is also important to choose additional successor trustees or provide a mechanism for selecting successor trustees.
Every person with special needs is different and faces unique challenges. This means that every special needs trust should be designed for that particular person. There is no one size fits all trust. In order to determine which special needs trust is right for your family you should meet with a qualified special needs planner to discuss your needs.
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