Special Needs Trusts: An Estate Planning Tool for Disabled Beneficiaries

I often deal with parents who struggle with how to treat all of their children “fairly” when it isn’t possible or advisable to treat all of their children equally.  One situation where this often occurs is when a child has a permanent disability that will leave them dependent upon government services throughout their entire lives.

When faced with this situation, parents often learn a special language that includes terms such as “countable resources” and “in-kind income”, and what these things may mean for their child’s eligibility for programs such as Supplemental Security Income, and state Medicaid programs, and how inheriting large sums of money and/or valuable property from loved ones can often render them ineligible for the aid that many disabled people rely on.

So what is a parent to do?

One option is a special needs trust.

There are two types of special needs trusts.  The first is a self-settled trust, meaning it is funded by the disabled person, or with property that belongs to them.  These trusts can be used to pay for many items that are not paid for by aid programs such as Social Security or Medicaid, and if used for these purposes, will not be counted as “income” or a “resource” for purposes of determining eligibility for aid.  These trusts can be established with a trusted person as trustee, or as part of a special needs trust for many beneficiaries that is controlled by a third-party entity.  This type of special needs trust is called a “pooled trust”.  If the special needs trust is not a pooled trust, it is required to have provisions requiring the repayment of any aid received by the beneficiary from the residue of the trust after the beneficiary passes away.  If the trust is a pooled trust, then the residue must be left to the trust for distribution to other beneficiaries of the pooled trust after the primary beneficiary passes away.

Parents and other family members also have the option of establishing a testamentary supplemental needs trust as part of their Wills.  These trusts can also be used to pay for the disabled loved one’s supplemental needs, and other family members can leave property and cash to these trusts as well, rather than making a bequest that will leave the recipient ineligible for the assistance they rely on.  However, you should exercise caution, because state Medicaid rules may cause certain distributions from the trust to be considered “income” to the recipient.

If parents or other family members are interested in establishing a special needs or a supplemental needs trust, they should consult with an attorney who can property draft the desired trust, and who can properly advise them with respect to what the trust can pay for, and what it cannot pay for without disqualifying their loved one for Social Security and Medicaid benefits.

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Filed under Pieces of the puzzle, Planning, Probates and Estates

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