If you or someone in your care is about to receive a settlement, you may be concerned about how the influx of income will impact your eligibility for government benefits. Thankfully, there are certain settlement planning strategies you can use to ensure these benefits continue once the funds arrive. A special needs trust, also called a supplemental needs trust, is created to pay for the goods and services that means-tested government benefits do not cover, so plaintiffs do not lose benefits after settlement.
Is a special needs trust the right move? Here are a few things to think about. We also welcome you to contact Milestone to consult with an experienced member of our team.
Addressing initial concerns
If a trust is the logical next step, the decisions associated with setup can also cause concerns. The biggest decisions families should focus on are:
- Selecting the right trust,
- Choosing the right trustee, and
- If necessary, hiring the right lawyer for the drafting of the trust.
Then, the three general concerns about a trust once it’s set up properly are:
- Management of the monies,
- Accounting, and
- Ongoing costs of administration.
The family making decisions should know exactly how much they are being charged for each person or company involved in the administration. The best framework for most families is to have an independent professional trustee and a professional wealth manager, instead of a large institution. The support network surrounding the trust should feel like an extension of the family, with the professionalism of a law firm or accounting firm. By consulting with an experienced settlement planner from day one, all of these issues can be addressed professionally.
People who receive SSI or Medicaid cannot keep more than $2,000 in their names and remain eligible for their benefits. A special needs trust is a solution to keeping benefits after receiving a settlement. Funds in the trust supplement the benefits programs by paying for “non-countable” expenses such as:
- A house
- Life insurance
- End-of-life expenses, and more.
Special needs trusts are created for the sole purpose of preserving governmental benefits of an individual who is disabled. When deciding to create a special needs trust, there are a few things that need to be done.
Select a trust
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 trust’s beneficiary. To protect against disqualification from means-tested government benefits, the trust instead directly pays for non-countable resources.
Select a trustee
The trustee is the person who will preside over the funds held within the special needs trust. If families forego hiring a financial manager for the trust, then the trustee will be the sole person in charge of the management of the funds in the trust. There are trust companies that are independent of major financial institutions and banks, and occasionally courts will allow the parents of the individual with disabilities to be the trustee—although this is rare, as it can be considered a conflict of interest.
Consult with a settlement planner
If you or your family member is about to receive a personal injury settlement, finding a settlement planner is the next step. A settlement planner works to strategize in the plaintiff’s best interest for their current and future financial stability. Talking to a settlement planner can also help clear up any confusion in the establishment process and will ensure you get the best plan tailored to his or her specific needs.
Ways to set 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 structured settlement 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.
Who can set up a special needs trust?
There are five types of people/organizations that can set up the trust, but each comes with its own set of guidelines.
A family member
A trusted and intelligent loved one can be a good choice as trustee if they understand the requirements of government benefit programs and special needs trust spending rules. Parents of children with special needs often inquire about acting as trustees 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 trustees, 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 ability to develop and maintain a personal relationship with each individual.
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.
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.
We know this information is a lot to understand. At Milestone, our experts assist people and their families in determining whether a special needs trust is a useful tool for them. If you have a settlement coming and you may benefit from a special needs trust, we can help. Contact Milestone today for assistance.