We recently set up a special needs trust for for a family member. It is an important part of planning for the future of a disabled individual and has large consequences if done incorrectly.
Special Needs Trust
Special needs trusts, or supplemental needs trusts, provide the means to care for a disabled child (or adult)Â after the parents or guardians have passed away. It holds money that would typically be provided to children through an inheritance or through a lawsuit settlement. It also shelters money so the disabled individual cannot be taken advantage of financially.
Why It Is Important
To be eligible for SSI, an individual must have limited resources [1] (including cash, savings, stocks, land, vehicles and life insurance policies), which is defined as $2,000 for an individual or $3,000 for a couple. A house and one vehicle are excluded, as are special needs trusts.
Many parents would agree that you currently give your disabled child a better quality of life than $2,000 could provide. You don’t want their quality of living to decline after you are gone. However, leaving an inheritance directly would jeopardize the SSI and Medicaid benefits. Without these government programs, the individual would be worse off financially even after receiving the inheritance.
A special needs trust is created to keep the disabled individual eligible for government assistance and provide a quality of life consistent with what they received when their caregiver was alive.
Our experience
Here’s some of the things I learned when we had the trust made.
- The trust cannot be created by the individual, so we created it for him.
- We worked with a lawyer to create the document. We were not willing to take a risk disqualifying him from SSI or Medicaid, so a do-it-yourself document from the internet was out of the question.
- There was another option about pooled trusts, but the remaining money would be distributed to a non-profit organization or the State. We did not look into this option, as we wanted the proceeds to be passed onto another family member when he dies.
- The trust names the current and future trustees and beneficiaries. The future beneficiaries do not need to be disabled. The trust dissolves upon his death and pays the proceeds to the beneficiaries directly (or creates additional trusts for the children under 25).
- The trusts are designed to provide money that focuses on quality of life above and beyond basic needs. The money can be used for special outings, vacations, and special interests such as a music class. It cannot be used for food, clothing and shelter.
Creating the trust was actually a simple process. We met a couple times with the lawyer to discuss options and learn about it. The hardest part was selecting the trustees and beneficiaries. Taking the first step to set up a meeting was half the battle.
Other considerations
- In addition, you need to notify and work with other family members who might have wills. Name the trust as a beneficiary and not the individual.
- The trust needs an EIN to file tax returns.
- For the applicable law, see Social Security Act: Section 1917(d)(4)(A) [2].
- A disabled person may qualify for the Disability Tax Credit [3].
The Simple Dollar recently had an article Setting My Own Personal Finance Goals [4] where a reader asked about a special-needs trust. Our experience should help that reader get started.Â