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Special-needs trusts: Maintain quality of life without losing benefits

March 16, 2021 Article 4 min read
Julie Cotant Wealth Management Shawn P. Riley Wealth Management

If a loved one has a disability, it’s never too early to think about their future. Special-needs trusts can provide long-term quality-of-life benefits while protecting assets and preserving essential benefits.

Parents sitting at a table with their child in a motorized wheelchairWhen you have a loved one with a disability, protecting and caring for them is always top-of-mind. If a person with a disability is — or may become — financially dependent on you, needs help making financial decisions, or relies on government benefits to help meet their functional needs, it’s never too early to plan for their future. Putting a special-needs, also called “supplemental,” trust (SNT) in place now can give you peace of mind knowing that your loved one will be properly cared for when you’re gone.

What’s a special-needs trust? 

If something happened to you tomorrow, what would happen to your loved one? Would they inherit and have immediate access to funds, making them ineligible for benefits like Medicaid? How long would those inherited assets last? And who would help them make financial decisions? An SNT helps answer these questions. 

SNTs are trusts that hold funds for discretionary distributions to a beneficiary, without counting toward their assets. This way, they can preserve their needs-based government benefits (e.g., Social Security income (SSI) and Medicaid) but still maintain their quality of life. In other words, the funds in these trusts are used to supplement the government benefits a person is receiving. Certain benefits can be prohibitively expensive to replicate, and maintaining government benefits where possible allows trust funds to last much longer. For example, a person with a brain injury receives government benefits that must be maintained. Their parents put funds into an SNT, and now, a trustee distributes the SNT funds for things that improve their quality of life and meet SNT distribution guidelines, such as installing a pool for aquatic therapy. Because these items don’t count toward their personal assets, they’re still able to qualify for the benefits they need. 

When is a special-needs trust appropriate?

SNTs are available based on a wide variety of needs. Anyone who qualifies for SSI or Medicaid will be a good candidate for an SNT, as those benefits could be at risk should a person’s assets increase. But people who don’t currently qualify for these kinds of government may still be appropriate candidates. SNTs are also often set up for someone who may qualify for and come to rely on these benefits in the future, for example, in the case of a degenerative condition.

SNTs can also benefit those who don’t rely on government benefits. For example, someone who needs help managing their own finances due to a mild disability that still allows a person to work, or even someone with a substance use disorder. Having an SNT in these scenarios not only helps to prevent misguided spending, allowing funds to provide quality of life over a much longer period, but it also protects the beneficiary from financial predators who may target someone they consider vulnerable. 

Because SNTs are available to such a large and varied population, they can be quite flexible. An interesting feature is that most third-party SNTs can be written to accommodate changes to a beneficiary’s needs or termination of the trust under certain conditions.

Structuring a special-needs trust 

There are a few things to consider when structuring an SNT. First, you’ll need to consider how it will be funded. A first-party SNT is typically funded by the beneficiary — often by settlement funds resulting from an injury. A third-party SNT is funded by anyone other than the beneficiary — parents, grandparents, and anyone else can contribute. This is a great solution for families who want to start planning early. An SNT can also be funded with proceeds from a life insurance policy if the trust is only necessary upon the death of a parent or other caregiver.

You’ll also need to consider who will be the trustee. Family members are often chosen because they understand the situation and can be counted on to act with love. SNT trusts, however, impose complicated and nuanced duties, which may be more than family members would expect. In this situation, many of our clients name a professional trustee. Choosing a professional with whom you have a good relationship can be preferable to naming a family member — professional trustees have the expertise required to do the job well and will consult with doctors, lawyers, and other members of the beneficiary’s “team” to make the best choices possible. 

Lastly, you’ll need to consider administration of the trust, such as tax considerations, distribution instructions, asset management, and care management. Assets require investment management, budgeting, and financial projections. While seemingly costly, building a team of professionals to assist with these details will help ensure the SNT’s success.   

Will a special-needs trust fit into your estate plan?

When considering whether an SNT will fit into your estate plan, the best thing you can do is talk to your trusted legal and financial advisors. Remember, not making estate planning decisions ahead of time will leave you with default state law provisions that may not be right for your family, especially when government benefits are in play. You’ll need to understand the requirements and the limitations before deciding if this is the best avenue for you. You can’t start this process too early, so give us a call if you would like to learn more.

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