Understanding Special Needs Trusts

Special Needs TrustsParents of children with special needs have many pressing concerns. As they manage their child’s day-to-day care, therapy, and education, they are also thinking about the future: What will my child’s needs be like when he is an adult? Who will care for him when I’m no longer able to? How will he meet his expenses?

If you have a child with special needs, these questions are familiar to you. You are probably determined to save as much money as you can to provide the best possible care for your child when you are no longer able to provide it directly. You should be aware, however, that saving, by itself, is not enough. Money you’ve saved for your child may quickly dwindle if you fail to consider state and federal benefits law.

Many adults with special needs or disabilities require some type of governmental support, including things like Medicaid, Supplemental Security Income (SSI), subsidized housing, and vocational rehabilitation. The catch is that most such benefits are need-based, meaning that recipients cannot have assets above a certain amount if they are to qualify for the program. As a result, they may need to “spend down” assets in order to qualify. Leaving assets to a child in a will means you might just as well have left them directly to the government. Even a standard living trust is often insufficient to protect your child and his or her inherited assets. You need to create and fund a special needs trust.

What is a Special Needs Trust?

A special needs trust, also known as a supplemental needs trust, allows individuals with certain chronic or acquired illnesses, or physical or mental disabilities, to have an unlimited amount of assets held in trust for their benefit. Assets that are held in this way are generally not counted when the beneficiary’s eligibility for government benefits is being calculated.

Special needs trusts were first given official legal status by the federal government in 1993, but they’ve been in use for decades. In addition to preserving a beneficiary’s eligibility for governmental need-based benefits and services, they offer the advantage of having a trustee to oversee the beneficiary’s assets. Obviously, this is necessary for those adults whose disabilities make them unable to manage their own finances.

Special needs trusts fall into two categories. The first-party trust, also known as a “self-settled” trust, is funded with the beneficiary’s own assets, or assets to which the beneficiary is entitled under law. A child who suffered a traumatic brain injury in a car accident caused by negligence, and was entitled to proceeds from a lawsuit, might have a first-party trust funded by those proceeds. A third-party trust, in contrast, is funded with assets that belong to someone other than the beneficiary or his or her spouse. For instance, money earned and saved by the parents or grandparents of a child with special needs would fund a third-party trust.

These categories matter, because whether a special needs trust is categorized as a first- or third-party trust affects a beneficiary’s qualification for certain benefits. If you’re considering establishing a trust for a child or adult with special needs, you should definitely consult an experienced estate planning attorney regarding how the trust should be funded to maximize benefit eligibility.

Requirements for a Special Needs Trust

What makes a special needs trust a special needs trust? It needs to meet certain requirements, set forth by Congress. A special needs or supplemental needs trust must:

  • be irrevocable;
  • be a separate entity with its own Federal Identification Number (and cannot be registered under the Social Security Number of either the beneficiary or creator of the trust);
  • be created for the benefit of an individual person under the age of 65 years;
  • be for the benefit of a person who is disabled according to Social Security standards.

If you have a child or loved one with special needs, it’s never too soon to establish and fund a trust for their benefit. To learn more about special needs/supplemental needs trusts and how they can benefit your loved one, talk to an experienced Oakland County estate planning attorney to learn more about establishing and funding a special needs trust. Attorney Jim Hubbert has helped numerous Michigan clients use trusts to protect their families and achieve other estate planning goals.