Do You Need a Special Needs Trust?

Man in wheelchair with Special Needs Trust

Sudden Wealth Protection Law can also help you with a special needs trust (SNT). Sometimes a “sudden wealth” event such as an inheritance can disqualify a person from government benefits. Without the special needs trust, the person’s financial resources need to be drained before the person can qualify for the government benefits again.

The result is that at some point, the person is going to have a net worth of $2,000 and have limited funds for travel, food, clothing, housing or education. However, with the special needs trust, the person can make the best of the situation. They continue to qualify for government benefits, and they have extra money for additional expenditures.

Here are some frequently asked questions about SNTs.

To have us create an SNT for you, call us NOW at 602-443-4888.

What is a special needs trust?

A special needs trust (or SNT) is a specialized trust created by a chronically ill person, physically disabled person, or mentally disabled person. It names the chronically ill person, physically disabled person, or mentally disabled person as the beneficiary. And it names a different person as trustee. It is irrevocable and it is established under 42 USC 1396p(d)(4)(A). The trust is designed to allow the person who is receiving Supplemental Security Income, Medicare or Medicaid to also receive private benefits. It is also a method of protecting the person from creditors.

What is a Third-Party Special Needs Trust?

This is actually called a Supplemental Needs Trust. It is commonly used by someone planning for a loved one with special needs. It is most commonly set up by the parents of an individual with a disability or special needs. However, grandparents, siblings, or any other person (other than the beneficiary) may also establish the Supplemental Needs Trust. A Supplemental Needs Trust can be included as a provision in a last will. It can also be established within an inter vivos trust (a “living trust”). Or it can be drafted as a stand-alone document. A Supplemental Needs Trust is typically funded upon the death of the person who established the trust.

Who needs a special needs trust?

If a person with a disability owns assets worth more than $2,000 for an individual or $3,000 for a couple, that person will be disqualified from social security income (SSI) benefits. Thus, if the person receives an inheritance or other payment that would otherwise disqualify that person from receiving public benefits, the disabled person can transfer the assets to a SNT and continue to qualify for public benefits. Without the SNT, the person would need to spend down their resources. But with the SNT, the person can continue to qualify for public benefits, while also having access to funds for trips, clothes, furniture, a car, and other expenses that would otherwise not be as feasible on a limited income and with only $2,000 of assets.

Who manages aN SNT?

The one who manages a special needs trust is called a Trustee. The trustee is the one in charge of overseeing the assets.

Is a special needs trust irrevocable?

Yes. However, there may be different ways to amend or revoke it. The term “irrevocable” simply means that the Grantor or Settlor (the person who initially funded the trust) cannot directly change or revoke it.

One way to amend or revoke a special needs trust is to have the trust provide for the appointment of a Trust Protector with the power to amend or revoke the trust. A Trust Protector is a person separate from the Grantor/Settlor and separate from the trustee.

What can aN SNT pay for?

It can pay for anything that is permitted under the terms of the trust document. For example, it can help the beneficiary pay for his or her home, ongoing monthly bills, or expenses such as internet services, electricity, phone, etc. It can also help the beneficiary on paying his or her vehicle maintenance if they have any, gadgets such as electronic equipment, computer, or even educational expenses if they are studying.

How can an SNT be used?

The special needs trust can pay for anything for the beneficiary as long as it is legal and does not violate any terms of the trust. For example, it can be used to pay for the beneficiary’s monthly bills such as internet services, electricity, phone, etc. It can also be used to pay for travel, education, caregiving, or medical services not provided by Medicaid.  However, it cannot pay the beneficiary directly.

Can a special needs trust pay rent and housing?

If the trustee pays for the beneficiary’s food, rent, housing, or shelter, the amount paid is taken into account as income to the beneficiary. It’s what we call in-kind support and maintenance (ISM). The Supplemental Security Income program treats in-kind support and maintenance differently from other income. The question of in-kind support and maintenance comes up with shelter because the SSI grant is so insufficient when it involves paying rent. A trust used for payments toward rent or mortgage payments on a house owned by the beneficiary is considered ISM and triggers a discount of the SSI program grant.

Who can be trustee of an SNT?

The trustee can be anyone other than the beneficiary. It could be the beneficiary’s parent, sibling, or other relative. A trustee can also be a family friend. However, if there is significant wealth in the trust (let’s say over $500,000), it would make sense to choose professional trustees such as an attorney, accountant, corporate trustee, or a trust company. There are a lot of rules and laws that apply to trustees. And an untrained family member or friend could become liable for failing to follow those rules and laws.

Who can be beneficiary of a special needs trust?

It’s designed and created for the care and well-being of a physically and mentally disabled person under the age of 65. The beneficiary of a special needs trust can be a chronically ill or physically and mentally disabled person who is receiving public benefits or assistance provided by Social Security such as Supplemental Security Income, Medicare or Medicaid.

When is a special needs trust (SNT) needed?

An SNT is needed in the following situation:

  • A chronically ill person, physically disabled person, or mentally disabled person is receiving government benefits that are intended for people with limited resources. Examples include Supplemental Security Income (SSI), Medicare and state Medicaid programs. A person on SSI cannot have assets worth more than $2,000 (or $3,000 for a married couple).
  • The person has assets in excess of $2,000 (or $3,000 for a married couple).
  • The person wants to be able to continue receiving the government benefits while also having the ability to supplement their lifestyle with the money in excess of $2,000 (or $3,000 for a married couple).

Can a special needs trust distribute cash to the beneficiary?

No. If a social security insurance (SSI) beneficiary receives cash or a gift card from a trust, his/her benefit will be reduced by one dollar for each dollar received, up to the point that he/she loses his or her SSI completely. This is a rule and should be disregarded only after a serious conversation with an attorney, that’s why you need to consult an attorney before creating a special needs trust.

Special needs trust and SSI

A properly drafted special needs trust will allow the person to continue receiving SSI. The SNT will allow a chronically ill, physically disabled person, or mentally disabled person who is receiving public benefits or assistance provided by Social Security (such as Supplemental Security Income, Medicare or Medicaid) to receive private benefits as well. It can help the beneficiary pay for any expense that is permitted in the trust. For example, it can help pay for his or her home, ongoing monthly bills, or expenses such as internet services, electricity, phone, etc. It can also help the beneficiary pay his or her vehicle maintenance if they have any. It can pay for gadgets such as electronic equipment, computer, or even educational expenses if they are studying.

If the trustee pays for the beneficiary’s food or shelter, the quantity paid is taken into account as income to the beneficiary. It is called in-kind support and maintenance (ISM). The Supplemental Security Income program treats ISM differently from other income. The question of in-kind support and maintenance comes up with shelter because the SSI grant is so insufficient when it involves paying rent. A SNT used for housing payments is taken into account in-kind support and maintenance or ISM. As a result, it will trigger a discount of the Supplemental Security Income program grant.

Special needs trust and SSDI

Social Security Disability Income (or SSDI) is a government program and is different from SSI. However both are handled by the Social Security Administration. SSDI is available to persons who have earned a sufficient number of work credits. On the other hand, SSI is available to low-income individuals who have either never worked at all or did not earn enough work credits to qualify for SSDI. Social Security Disability Income is paid to those individuals who have worked and paid into the Social Security system over a particular period of time, Social Security Disability Income is actually an insurance program and not a welfare program. SSDI isn’t “needs-based.” A person’s assets or other income do not have any effect on eligibility for receipt of SSDI benefits.

Special needs trust vs. ABLE account

An ABLE (Achieving a Better Life Experience) accounts is created to protect resources. Both a special needs trust and ABLE account are designed and created for the benefit of an individual with a disability, without jeopardizing or affecting key federally funded benefits like Supplemental Security Income (SSI) and Medicaid. However, ABLE accounts can only be established for the benefit of people who developed their disabilities before turning 26 years old. On the other hand, if a special needs trust is created with funds from the trust beneficiary, it does not matter when the person developed the disability. A SNT has a trustee who has a legal obligation to safeguard the trust.  We mention this because some people with disabilities can be taken advantage of if they have control of their own funds in an ABLE account. A SNT has more flexibility in terms of how much can be contributed to it. There is no limit to how much can be transferred to a SNT. However, ABLE accounts are limited to $15,000 per year and can hold up to $100,000 without affecting a Supplemental Security Income (SSI) beneficiary’s eligibility.

ABLE accounts are easy to set up but without the assistance of a qualified special needs planner, the use of an ABLE account could seriously affect government assistance. If there are funds remaining in an ABLE account upon the death of the account beneficiary, they need to be first used to reimburse the government for Medicaid benefits received by the beneficiary. Then the remaining funds will need to undergo probate in order to be transferred to the beneficiary’s heirs. A properly drafted SNT should avoid probate. It all boils down to talking to an attorney before setting up an ABLE account to determine if something like a SNT might be more beneficial.

Can a special needs trust pay for clothing?

Yes, this is considered as a purchase of personal items like paying your internet service or a phone bill. It will not have any impact on the beneficiary’s Supplemental Security Income grant.

Is a special needs trust taxable?

If the self-settled special needs trust is considered a Grantor Trust, all items are generally taxed to the person who funded the SNT, who also happens to be the beneficiary.

Who inherits a special needs trust?

The persons named as beneficiaries in the trust inherit the trust assets after the primary beneficiary passes away. If there are no contingent beneficiaries named, the trust is said to “fail.” In that case, the assets go to probate and are distributed under the state law of where the disabled person was a resident.

Conclusion

Hopefully this information about special needs trusts has been helpful. If you have any questions, please give us your information HERE. (When it asks for the Practice Area, you can choose either Estate Planning or Other.)

ABOUT THE AUTHOR

Founding attorney Paul Deloughery has been an attorney since 1998, became a Certified Family Wealth Advisor. He is also the founder of Sudden Wealth Protection Law.

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