New Horizons Un-Limited Inc.
Guide on Special Needs Trusts for People with Disabilities
March 31, 2016
Special needs estate planning is essential to parents with children with disabilities. At some point in their life when children with special needs require government benefits such as Medical Assistance (Medicaid (M.A.) or Title XIX) or Supplemental Security Income (SSI) a parent's estate could prohibit their child from being eligible. The Special Needs Trust is a contract which allows parents or another person to financially supplement a person with a disability without conflicting with the government welfare benefits.
There is much to consider when financially planning for your special needs child. New Horizons Un-Limited hopes that the options presented in this guide will educate you on special needs trusts and help make benefiting from their parent's estate a possibility for individuals with disabilities.
New Horizons Un-Limited assumes no responsibility in guaranteeing the services, programs or conditions as described. Consult an attorney, preferrably one who is familiar with your state regulations and special needs trusts laws, and who can evaluate your financial and special needs situation. If you are interested in a resource listed below, check it out, call or contact the resource to verify the current situation. Evaluate information and make your own decisions when using this guide.
Following is a quick outline of this guide, click on the link to go directly to the section of your choice:
What is a Special Needs Trust?
People with disabilities who apply for public assistance such as Medicaid and Supplemental Security Income (SSI) from the government must go through a "means testing," a determination to see if they are eligible based on their income and assets. An individual cannot be eligible if they have more than $2000 in available assets. If a person with disabilities has more in assets, they must spend their assets down before they can apply for assistance and/or keep their assets below $2000 while on assistance. With traditional inheritance or trusts, if parents, grandparents or other family members allow thier assets to be inherited by their special needs relative through the normal laws of inheritance, they could cut the person with disabilities out of their government benefits. This also applies to those on SSDI.
The Special Needs Trust is a contract which allows parents or another person to financially supplement a person with a disability without conflicting with the government welfare benefits. Under the Medicaid law, Omnibus Budget Reconciliation Act of 1993 (OBRA-93) one is allowed to create a Special Needs Trust (SNT), in which assets are not counted as income and will not affect the child's eligibility to receive public assistance. The following describes what you and your family members need to know and do now to ensure benefit elegibility for your child with special needs.
What You Need to Know and Do Now to Ensure Benefit Eligibility for Your Child(ren) with Special Needs
- To set up a Special Needs Trust, the person with a disability must have a disbility as defined by the Social Security Administration, be on low income and have less than $2,000 in assets. These are the rules for government benefit eligibility. To maintain these low assets and keep government benefit eligibility, people with disabilities should not inherit assets.
- The Special Needs Trust is set up for the sole benefit of the beneficiary (no one else can benefit from the fund) and the SNT when funded is irrevocable (the funds cannot be returned or redesignated.
- If you give money to your child before your death, it is considered a gift and therefore an asset.
- If you are a parent and have assets that your child will automatically receive when you pass, instead of disinheriting your child with a disability, you should set up a trust so these funds will not be inherited directly.
- It is very important to notify all grandparents, as well as other family members, so they do not allow direct inheritance to the family member with a disability. Well meaning family members could cut your child out of government benefits. If they wish to leave inheritance to your special needs child, grandparents and other family members can set up a 3rd party trust.
- Do not make a guardian or a conservator the trustee for the trust, as the IRS will look upon them as beneficiaries of the trust.
- Common sense also dictates that you should not leave the family member's share to siblings as inheritance can become complicated with divorce, debt, denial or death and the family member with the disability could end up with no support which is not what you intended.
- There are restrictions for what the trust money can and cannot do for the family member with a disability. There are laws governing trusts such as state statutes, IRS, and Social Security. This is why it is important to find an attorney that is familiar with how to set up the special needs trust.
- The Special Needs Trust owns the assets. The child can have no authority to reach or control the assets, or they can lose eligibility.
- The Trustee has the authority and controls the income distribution so the child can keep eligibility in government benefits. The Trustee must know what can or cannot be supplemented with the trust. Only the Trustee can pay for any eligible goods and services directly from the trust on the child's behalf. No payment should be made to the child to purchase items when needed.
- When the special needs child dies remaining assets are distributed usually to siblings or other family members of the child. The remainder must go to a person and is not allowed to go to a charity or other entity.
- If, however, the remainder actually belongs to the child (accumulated work compensation or compensation from a recovery), then the state will have a lien for the government provided benefits that must be reimbursed to the state.
This is the Government Assistance that is available to the child with special needs.
- SSI the monthly cash benefits of SSI are based on need and granted for basic needs such housing or food.
- Medicare/Medicaid Most states set a $2,000 asset limit for the continued eligibility on Medicaid.
The special needs trust protects the eligibility of Medicaid because the beneficiary does not have direct access to the funds.
Is Your Estate Plan in Order?
Do you have an Estate Plan?
Have you designated Advanced Directives?
Before you begin to think about Special Needs Trusts, put your affairs in order.
What assets need to be assigned beneficiaries and which assets should be assigned to fund the Special Needs Trust?
Finding the Right Special Needs Trust
- 1st Party Trust – the disabled person has acquired income from accumulated work or part of a personal injury recovery. To remain on government assistance the court places money in a special needs trust.
1. Disabled person is beneficiary of the trust, but also owns the money.
2. Taxable to the recipient.
3. This Trust will need a trustee.
4. When the person with a disability dies the remainder in the SNT will go to the state to pay back what was paid on the beneficiaries behalf throught Medicaid.
- 2nd Party Trust - Funded when both parents pass on- Parents set up the fund while they are still alive. When both parents die the money goes to the trust, it becomes irrevocable at this point.
1. The disabled person is the beneficiary, but not the owner of the money.
2. No one else can receive the money until the beneficiary dies. (i.e. cannot pay for a companion in transportation, see IRS rules)
3. Leftover would go to other siblings
4. Leftover cannot go to charity – only to individuals
- 3rd party trust.
1. Grandparents or other family members can set up a 3rd party trust.
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[Updated March 31, 2016]
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