Special Needs Trust

What is a special needs trust?

A special needs trust is a type of account that pays for goods and services that a person’s government benefits do not cover. Money in a special needs trust does not count toward the income limit required to maintain means-tested government benefits such as Supplemental Security Income (SSI) and Medicaid.

Planning for settlement 

Individuals who will receive a personal injury settlement could become disqualified from benefits that have income and asset limits. However, the funds from a settlement are often not enough to offset the loss of this aid. With the help of a settlement planner, beneficiaries can create a special needs trust to ensure they make the most of their settlement while keeping the benefits they need.

A settlement planner offers invaluable assistance for families about to reach a personal injury settlement, especially those who need to set up a special needs trust. By working with an experienced settlement planner, all steps involved in trust setup and management can be handled professionally. At Milestone, our experts assist families in determining which type of trust is best suited to their needs. We ensure all the necessary legal work and required documentation are prepared in a timely manner and that all special needs trust requirements are met. Our trusts carry an all-in fee of 1.25% on the assets placed into trust. Give us a call today to learn more.

What can a special needs trust be used for?

Funds in a special needs trust can pay for a variety of goods and services. People receiving SSI and/or Medicaid typically cannot have more than $2,000 in monthly income or assets without losing eligibility for benefits. Money in a special needs trust fund supplements a person’s government benefits without replacing them by paying for non-countable resources.

According to the Social Security Administration, items a special needs trust can cover include:

  • A home and its property.
  • A vehicle that is used by the beneficiary or a member of his or her household for transportation.
  • Household goods and personal effects.
  • Life insurance policies (within SSI’s combined face value limit).
  • Burial spaces for the beneficiary and his or her immediate family.
  • Burial funds for the beneficiary and his or her spouse (within SSI’s value limit).
  • Property used in a trade or business or on the job if the beneficiary works for someone else.
  • Money or property set aside under a Plan to Achieve Self-Support (PASS).
  • Up to $100,000 of funds in an ABLE account.

A beneficiary can use the funds from a special needs trust to pay for these non-countable items to help maintain eligibility for government benefits.

Because its sole purpose is to ensure the preservation of government benefits, anyone who currently claims government aid or benefits can make use of a special needs trust. This option can also be useful for individuals who may not yet take advantage of such programs but who know that they will need to in the future.

Types of special needs trusts

There are two types of special needs trusts:

A first-party trust requires that the assets come directly from the beneficiary — for example, from a personal injury settlement or inheritance. Upon the death of the individual, the remainder of a first-party trust will typically reimburse the government for what it has paid out in benefits. This means that the beneficiary can use a first-party trust to help keep eligibility for SSI and Medicaid, but after he or she passes away, the government is paid back first from the trust assets before they can go to anyone else.

A third-party trust is usually created by a disabled person’s family to ensure he or she receives the present and future care they want and expect. Parents who set up a third-party trust will have more control than they would with a first-party trust. Upon the beneficiary’s death, the balance in the trust could be allocated elsewhere, as the government does not get paid back.

With both kinds of trusts, the money cannot be given directly to the disabled person. To protect against disqualification from means-tested government benefits, the trust instead pays for non-countable resources directly.

How to set up a special needs trust

The only reason to create a special needs trust is to preserve government benefits. Families should first speak with an expert to decide whether this planning tool is the best option. If it is, the biggest decisions families should focus on are:

  • Choosing an option for setting up the trust.
  • Appointing a trustee.
  • Working with a settlement planner.
  • If necessary, hiring a lawyer for the drafting of the trust.

Choosing an option for setting up the trust

There are two ways to set up a special need trust. Both can be funded with the individual’s assets, but each comes with its own set of guidelines.

Self-settled special needs trust

Individuals are eligible for a self-settled special needs trust if they are under age 65 and classified as disabled by Social Security Administration and/or State Medicaid Agency standards. The beneficiary or a parent, grandparent, legal guardian, or court must establish the trust, and assets can only be used for goods and services provided for the benefit of the disabled individual.

Pooled special needs trust

A pooled special needs trust is a cost-effective and flexible solution. Individuals are eligible if they are classified as disabled by Social Security Administration and/or State Medicaid Agency standards, and there are no age restrictions. Managed by nonprofit organizations, pooled trusts maintain separate accounts for each trust beneficiary, and the funds are pooled for purposes of investment management. Each separate trust account must be established solely for the beneficiary. Only that individual or his or her parent, grandparent, legal guardian, or the court may place funds in the trust. The grantor, meaning the individual entering into the trust agreement, must sign a joinder agreement to “join” the pooled trust. The terms of the trust are set forth in a master trust agreement.

As with self-settled special needs trusts, distributions from a pooled trust are used solely for goods and services provided for the benefit of the disabled individual. Distributions are paid by the trustee directly to the providers of the goods and services to ensure the money is not counted as an asset or resource for Medicaid and SSI eligibility purposes.

How to choose a trustee

Selecting a trustee is a critical and sometimes difficult decision when establishing a special needs trust. Below are the common candidates to be designated as trustee and some of their advantages and disadvantages.

A family member

A trusted and intelligent loved one can be a good choice as trustee if they are equipped with the capability of understanding the requirements of government benefit programs and special needs trust spending rules. Parents of children with special needs often inquire about acting as trustee themselves. However, the court may discourage this choice. There’s also a great deal of fiscal responsibility, attention to detail, and legal knowledge required to manage a trust properly; the added responsibility may be difficult for a parent to handle on top of caring for a person with special needs.

An independent trustee

Some people turn to independent trustee, meaning people or firms-for-hire that manage trusts. Many attorneys, accountants, investment companies and banks offer this service. Expertise and autonomy are the benefits of hiring a professional. As an added benefit, independent trust management entities are required by law to comply with statutes and ensure that the beneficiary’s interests are kept at the forefront of every decision.

A financial institution

A bank can serve as a trustee for a special needs trust. However, large financial institutions often charge high fees without the flexibility needed in the complex world of special needs trusts. It’s often better to find a trustee who has both financial expertise and the time to communicate when needed.

Multiple trustees

Trusts can have co-trustees. One option is to appoint both an independent trustee and a trusted family member to administer the trust together. This choice is beneficial in that it combines the expert’s experience and technical know-how with personal knowledge and concern.

The best framework for most families is to have an independent professional trustee and a professional wealth manager administer the trust. Typically, the larger the institution handling the trust, the more expensive and less personal the experience. The support network for a special needs trust should feel like an extension of the family along with the professionalism of a firm.

Trust protector

It may be uncomfortable or worrisome to have someone else, especially a bank or professional trustee, oversee the assets from settlement. Families should consider appointing a trust protector, which is a person designated to watch over the trust. Trust protectors can be granted special powers per the trust document, from mediating conflicts between trustees and the beneficiary to replacing an unsatisfactory trustee. This option helps ensure the best interests of the beneficiary are paramount.

If you’re considering a special needs trust, we welcome you to contact Milestone with any questions.