You can create what is referred to as a special needs trust (also known as a supplemental trust) for a disabled person. This trust allows you to avoid limiting the disabled person’s eligibility for government benefits. Normally when a person who is receiving government benefits such as supplemental security income or Medicaid gets a monetary gift or inheritance, their eligibility for these programs will be reduced or completely eliminated.
These trusts are also commonly used to distribute inheritances or even proceeds from a personal injury settlement on behalf of the disabled person. Other benefits include the trust being tax deductible and the fact that the trust’s funds are not available for creditors or paying judgments.
This money will only be used to continue caring for the diabled person. Some disadvantages include annual fees/high costs, limited input from the beneficiary in how the money is spent, and the fact that certain funds must be used only to pay back Medicaid.
Many parents of disabled children decide to set up special needs trusts so they know their children will receive what they intend, while still being eligible for future government benefits. How it works is instead of giving money or other property to someone as a gift or inheritance, you direct it to the trust. Like a normal trust, there will need to be a trustee that controls the funds.
The trustee will have discretion over how to spend the trust’s funds. For example, the trustee can use the trust assets in the special needs trust to purchase supplies for your loved one. The trustee can also buy services and products, such as personal care supplies, vacations, home items, furniture, medical and dental expenses, education, vehicles, physical therapy, and other necessities.
Special needs trusts may be funded through various sources. This can include funds from a will, gifts from friends or relatives that are deposited directly into the trust, and/or survivorship life insurance policies.
No matter where the money comes from, the important thing is that it is put into the trust for the benefit of the recipient instead of giving the money to the recipient directly. The trust will generally terminate when the money runs out or the trust beneficiary passes away.
While laws may vary amongst the states, the document setting up a special needs trust should include the following elements in order to be legally enforceable:
- The document should be titled “Irrevocable Special Needs Trust” or “Supplemental Needs Trust”;
- It should include the disabled person’s legal name and designate them as the beneficiary of the trust;
- The language in the document should make it impossible for the beneficiary to demand a different distribution of the trust funds (i.e., it should only be made for the purpose of benefiting that particular person and not others);
- There should be language in the document that states the special needs trust intends to provide “supplemental and extra care” beyond what the government may offer the beneficiary;
- The trustee appointed in the document must have full discretion to manage and spend the trust assets according to the trust’s purpose;
- The trust is to be administered in a way that does not jeopardize the beneficiary’s eligibility for government benefits or assistance; and
- The document must specify that the trust is not intended to be simply a support trust, but that the funds are intended solely for the purpose of supplementing government benefits.
Having these things included and clearly detailed in the trust document should alleviate many (if not all) concerns down the road if a dispute arises. Unclear trust language can cause problems if someone ever contests the trust’s validity.
You may wish to supplement your special needs trust document with a “letter of intent” which further defines your intentions regarding the use of the trust funds. A letter of intent provides further information about the beneficiary to family members, relatives, and other persons who may be involved with the trust.
This type of letter is especially helpful when a parent is setting up a special needs trust for their child after the parent passes away. In that case, the letter of intent is basically a detailed guide to those who will take care of your child when you are no longer able. While there are no rules governing what to put in this letter, you may choose to include the following information in your letter of intent:
- Information about your child;
- Financial instructions;
- Medical history and any special considerations;
- Important social contacts;
- Physical and mental limitations;
- Daily schedule;
- The child’s personality disposition, skills, hobbies, and abilities;
- Religion; and
- Your child’s various goals and aspirations.
Anyone can create a special needs trust as long as the required language is included. However, special needs trusts are very unique trusts that apply in limited circumstances. As such, you may consider hiring an experienced estate planning attorney to assist you in planning, drafting, and reviewing the trust documents, as well as a letter of intent if so desired. An attorney can also make sure all your state laws are met and the trust language is clearly written.
Alternatively, a special needs trust can often be established through the guidance of a structured settlement planner.