Broker Check
Simon Says®: Special Needs Trusts

Simon Says®: Special Needs Trusts

October 14, 2021

For families caring for a loved one with a disability, special needs trusts—also called supplemental needs trusts—can provide a sense of security. Special needs trusts allow the family to improve the quality of life for the loved one without jeopardizing eligibility for government benefits including Supplemental Security Income (SSI), Medicaid benefits, vocational rehabilitation, subsidized housing, and other benefits based upon need.

Many people make the mistake of leaving assets to their disabled loved ones through a will. This can be problematic because acquiring assets, such as a lump sum of money, can disqualify your loved one for these types of government assistance programs. By setting up a special needs trust, instead of solely using a will, you can help avoid these issues; and in addition to benefitting from the wealth held by the trust, your heir may be able to continue to collect government benefits.

If your heir or loved one lacks the legal capacity to handle his or her own financial affairs, there can be administrative advantages of using a trust to hold and manage property intended for the benefit of the beneficiary.

In addition to being funded by a parent, special needs trusts are frequently used to receive an inheritance or personal injury settlement proceeds on behalf of a person with disability, or are founded from the proceeds of compensation for insurance settlements, litigation, or criminal injuries.

When creating the trust, you need to choose someone to serve as trustee who will have complete discretion over the trust property and will be in charge of spending money on your loved one’s behalf. The trustee can be a family member or, if an appropriate and trustworthy family member is unavailable, a third party will be appointed by the court.

Because your heir will have no control over the trust or its assets, for program eligibility purposes SSI and Medicaid administrators will ignore the trust property. In addition, if the beneficiary is ever sued, the funds in his or her special needs trust cannot be touched, as they are not subject to any judgment. A special needs trust is much safer than the antiquated practice of “disinheritance,” which was a means of providing for a disabled or ill person by putting all of his or her assets in the custody of a relative or sibling. A non-disabled third party holding assets for the benefit of a disabled sibling could be subject to liabilities such as judgments from automobile accidents, a bankruptcy, or a divorce.

Even if you and your family are not interested in government benefits, you should still consider a special needs trust to address those specific needs. Furthermore, you never know what the future holds. There is no sense in sacrificing government services that could be beneficial for your disabled loved one in the future. But if you’re certain you don’t need to worry about government support, you can set up a “general support” special needs trust designed to serve as the primary or sole source of benefits for the beneficiary.

The special needs trust ends when it is no longer needed—most commonly at the beneficiary’s death or when the trust funds have all been spent.

How Special Needs Trust Funds Can Be Used

According to the law, a special needs trust can be used for “supplemental and extra care over and above what the government provides.” The trustee cannot give money directly to your heir, because that would interfere with his or her eligibility for SSI and Medicaid. But the trustee can spend trust assets to buy a wide variety of goods and services for your loved one. Special needs trust funds are commonly used to pay for personal care attendants, vacations, home furnishings, out-of-pocket medical and dental expenses, education, recreation, vehicles, and physical rehabilitation.

Although there are Medicaid rules that say that the trust cannot be used for housing or food without risking loss of Medicaid benefits, these rules have to be interpreted carefully. For example, there is no restriction on having the trust purchase an accessible home or making accessibility adaptations to an existing home. Likewise, although everyday foodstuffs are not strictly allowable under the rules, social events such as dinner parties are; likewise, entertainment and vacations are permitted. When in doubt, you should check with your qualified financial advisor or lawyer to determine what expenditures are allowed.

If the trustee of a special needs trust pays for the beneficiary’s food or shelter, the amount paid is considered income to the beneficiary. Specifically, it’s called in-kind income or in-kind support and maintenance (ISM). The SSI program treats ISM differently from other types of income.

Pooled Trusts

Pooled trusts are a type of special needs trust managed by nonprofit organizations. The controlling organization pools the money from multiple clients and invests it. Each beneficiary still has his or her own separate account and his or her own trustee, chosen by the nonprofit organization. The appointed trustee purchases items for the beneficiary, just like a trustee appointed by the family or the court would.

If you are having difficulty identifying someone who would be a good fit as a trustee, a pooled trust may be an appropriate solution.

Setting Up a Special Needs Trust

Special needs trusts should be set up under the guidance of a structured settlement planner in cooperation with a qualified legal and financial team to ensure the trust is set up correctly. The trust documents should state that it is intended to provide “supplemental and extra care” over and above that which the government provides. The trust must state that it is not intended to be a basic support trust, and should not contain an estate tax provision called a Crummey clause. A properly drafted trust will address the issue concerning paybacks to Medicaid or other such sources. The United States Congress mandates that repayment language must be included in all special needs trusts, whether repayment is required or not.

A poorly written special needs trust can cause a loss of benefits, a loss of savings, or other financial and legal hardships for the beneficiary or the trustee. If you wish to pass benefits to an heir or loved one with a disability or chronic illness, you would be well advised to utilize the services of an attorney who specializes in trusts and other financial issues pertaining to those with special needs.

Simon Says…

If you’re caring for someone with a disability, a special needs trust—also called a supplemental needs trust—can provide a sensible solution. Rather than leaving assets to your disabled loved one through a will, a special needs trusts allows you to continue the quality of life for your loved one without jeopardizing eligibility for government benefits including Supplemental Security Income (SSI), Medicaid benefits, vocational rehabilitation, subsidized housing, and other benefits based upon need.

Saul Simon is a registered representative of Lincoln Financial Advisors.

Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and registered investment advisor.  Insurance offered through Lincoln affiliates and other fine companies. Simon Financial Group is not an affiliate of Lincoln Financial Advisors. CRN-2709328-083019