If the beneficiaries of your estate include anyone with significant physical or mental limitations making it likely he or she will require continuing care, you should think about a special needs trust, especially if it’s important to retain that individual’s eligibility for government benefits programs, such as Medicaid or Supplemental Security Income (SSI).
For example, suppose a son or daughter has a condition, such as Down’s syndrome, that limits the ability to live independently and be self-supporting. While the parents are alive, they can see the child receives needed care. But what happens when they are no longer available as caregivers?
Widely-used government benefits programs, such as SSI and Medicaid, have very strict eligibility limits that look at not just a beneficiary’s individual income, but also the assets and resources available to that beneficiary. Receiving a direct cash bequest from a parent’s estate could have the unfortunate effect of rendering the beneficiary ineligible for programs providing needed care.
Special needs trusts are a way to provide for the individual without jeopardizing eligibility for such benefits programs. There are three basic types of irrevocable special needs trusts, varying with how they are created and funded.
An individual with sufficient funds who foresees that he or she may eventually need continuing care can self-fund a so-called “first-person” special needs trust, with the dedicated funds to be used solely for the care of that individual. Under the law, someone else (a parent or grandparent, guardian or supervising court) must actually set up the trust. First-person trusts also require, upon the trust’s end, that any remaining funds first go towards repaying the government for received services. Only after that repayment can remaining trust funds be transferred to other beneficiaries.
Far more common are third-party special needs trusts, created with funds from persons other than the beneficiary – for example, by friends or family members. They are easier to establish than are first-person special needs trusts, permitting contributions from any competent adult, not just relatives. Further, any remaining funds when the trust terminates may be transferred to other beneficiaries, without having first to repay government benefits programs.
Finally, under the terms of a 1993 tax and budget law, non-profit organizations can create and administer “pooled” special needs trusts providing services to multiple individuals. For example, a group home might create a pooled special needs trust for its residents, each of whom would have a separate account. The non-profit trustee uses the pooled funds for investments and caregiving.
As with “first-person” special needs trusts can only receive funds from certain sources, and the non-profit trustees must expand funds for their specified purposes. Any funds left in an individual’s account remain with the sponsoring non-profit, rather than reimbursing government-provided benefits or being transferred to other beneficiaries.
A special needs trust may be the answer for assuring continuing care for an individual with disabilities, but it involves specialized rules and requires careful advance planning. Make sure you consult an experienced advisor if you are considering your options in the area of special needs trusts.