Special needs trusts can make sure a beneficiary with a disability can inherit from family while staying eligible for important government benefits.
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A special needs or supplemental trust is designed to provide funds for someone with a disability, while preserving the person's eligibility for important government benefits. Commonly, parents set up special needs trusts for the benefit of a child who has a disability. Because the trust, not the child, owns and controls the trust assets, it doesn't jeopardize the child's eligibility for Supplemental Security Income (SSI) and medical coverage under Medicaid.
Who Needs a Special Needs Trust?
People who have a disability may need various kinds of lifelong help. (See AllLaw's collection of articles on disability benefits and determinations.) Health insurance can be a particularly important issue, because someone with a serious disability may never hold a job that offers health insurance. That makes it crucial to get coverage under Medicaid, a federal-state program. But Medicaid offers benefits only to people who have very limited income and resources. If parents leave assets to a child with a disability, that inheritance can make it impossible for the child to qualify for Medicaid.
That's where a special needs trust comes in. By leaving funds in trust for a child, instead of leaving them directly to a child, parents can avoid affecting eligibility for benefits. The child doesn't have any control over the trust funds—they are under the control of the trustee the parents chose. Even a trust with hundreds of thousands of dollars of assets won't affect Medicaid eligibility. In the language used by the government, the trust funds are not counted as a resource of the beneficiary.
To learn more about special needs trusts, who can benefit from them, and how to set one up, see Special Needs Trusts—Protect Your Child's Financial Future, by Kevin Urbatsch (Nolo).
How the Trust Works
Like all trusts, a special needs trust is organized around the people in three roles:
- a settlor (also called grantor) who creates the trust and provides the money
- a beneficiary (the person with the disability), and
- a trustee, who manages the money for the sole benefit of the beneficiary.
The trust can be set up while parents are alive, or it can come into being at their death, through provisions in the parent's will. Typically, the parents choose someone who knows the beneficiary well—a sibling or close family friend—to serve as trustee.
Serving as Trustee
If you are named as the trustee of a special needs trust, you may have many years of service in front of you, because the trust will last as long as there's money in it and the beneficiary is alive. Here's an overview of your duties:
- Manage and invest trust funds prudently, in accordance with the terms of the trust document and state law
- Spend trust assets only for the beneficiary
- Keep up with laws on eligibility for SSI and Medicaid, so that you don't inadvertently jeopardize the beneficiary's ability to get benefits
- Keep meticulous records of all spending
- Prepare annual reports as required by SSI and Medicaid
- File federal and state trust tax returns
- Use trust funds to meet the beneficiary's needs for goods or services not provided by government benefits, as far as possible
You can spend trust funds only for the benefit of the person with the disability, to supplement government benefits. This means that they can be spent for almost anything that helps the beneficiary except food, clothing, and shelter. For just a few examples, the trust might pay for a motorized wheelchair, a specially equipped van, a vacation, household furnishings, courses at a local adult school, or theater tickets.
The trustee is also responsible for ending the trust, when it's appropriate. Of course, the trust ends if the beneficiary dies; any remaining trust funds go to the person (called the remainder beneficiary) named in the trust document to receive them. The trustee is generally authorized to terminate the trust if the beneficiary no longer needs government benefits, is no longer eligible for them, or the value of the trust assets falls so low that it doesn't make sense to keep administering the trust.