If you are the parent or grandparent of a minor or adult with special needs, you’ve likely heard people saying you need a special needs trust to protect them.
What is a special needs trust?
To understand a special needs trust, you first need to understand a trust in general. When people leave money to or put money in trust for someone else, the money is held in a special account instead of giving it outright to the person it will benefit. Trusts may be used for many different reasons including leaving money to a minor child, to an adult child who is financially irresponsible, or to a person with an intellectual or developmental disability. In the last instance, the trust used is called a special needs—or supplemental needs–trust. In any type of trust, a trustee is appointed to handle its administration on behalf of the beneficiary.
Special needs trusts are important not only because the special needs person may lack the capacity to manage their own financial affairs, but more so because intellectually- or developmentally-disabled people receiving (or hoping to qualify for) government benefits may lose (or not qualify for) those benefits if they come into even a nominal amount of money outright. While the particular threshold may vary based on various factors, it is generally below the poverty level–as low as $2,000 in total income and assets—for an individual receiving certain government benefits.
If a parent or grandparent dies leaving money to a disabled child or adult without a trust in place or without directing that the bequest must be placed in a special needs trust—or dies without a will at all in a situation where the disabled child automatically inherits through intestacy– the financial windfall will result in them losing or not qualifying for government benefits.
What can special needs trust funds be used for?
Without compromising the beneficiary’s eligibility for government benefits and depending on the type of special needs trust, funds can generally be used for a variety of life-enhancing expenditures including but not limited to:
- Annual check-ups at an independent medical facility;
- Supplemental education and tutoring;
- Out-of-pocket medical and dental expenses;
- Transportation (including purchase and maintenance of a vehicle);
- Materials for a hobby or recreation activity;
- Trips or vacations;
- Entertainment such as movies, shows or ballgames;
- Goods and services that add pleasure and quality to life such as computers, videos, furniture or electronics;
- Athletic training or competitions;
- Special dietary needs;
- Personal care attendant or escort.
Types of Special Needs Trusts
Essentially, there are three (3) types of special needs trusts: a first-party trust, a third-party trust, and a pooled trust. A New York special needs planning attorney can help you determine which type is best for your particular situation.
Whatever option you choose, a trustee will administer the trust for the benefit of the disabled beneficiary. A trust enables your disabled love one to enjoy a better quality of life without jeopardizing their government benefits.
A first-party special needs trust is funded with money from the special needs person himself. Often, the source of first-party trust may the proceeds of a lawsuit after a verdict or settlement in favor of the intellectually- or developmentally-disabled person, such as a car accident or birth injury lawsuit. These awards are generally significant and the trust creates a source to fund certain needs of the disabled person beyond what Medicaid and other government benefits may cover.
The second trust option is a third-party trust. In a third-party trust, someone other than the disabled person funds the trust. Generally, it’s a parent or grandparent. The trust can be created in someone’s will – – called a testamentary trust – – or while the person is still alive. This is the most popular option in part because it protects against the government accessing the balance upon the beneficiary’s death.
The third option is a pooled special needs trust (“PSNT”). With this option, instead of creating an individual first- or third-party trust, the funds of or for the disabled person are deposited into an existing “pooled” trust that’s generally administered by a not-for-profit organization, as the trustee. While the trust simultaneously handles the pooled funds of multiple other beneficiaries, the funds of each disabled beneficiary are earmarked and accessible for the trustee to pay requested, allowable expenses of each beneficiary.
Your estate planning attorney will review the pros and cons of each option including what happens to the remaining trust assets when the beneficiary dies. Depending on the trust chosen, Medicaid may be entitled to offset the total sum of benefits paid by the government during the beneficiary’s lifetime from the balance of the trust—or alternatively may be shut out from accessing a dime.
MUST HAVE PLANNING: Choosing and timely implementing the right special needs trust for your disabled loved one is crucial to ensuring their continued eligibility for government benefits and safeguarding funds to provide them with a better quality of life. Equally important is having a comprehensive special needs estate plan in place.
For more information, download our FREE report of 10 Must Have Documents for All Parents of Special Needs Children.
At Sverdlov Law, we are dedicated to helping our clients get the peace of mind that comes with getting their affairs in order, preserving their assets, and protecting their families. From our office on Wall Street, we represent clients throughout New York City and New York State in all aspects of estate planning, estate administration, Medicaid planning, elder law, and business succession matters.
Contact us to book your estate planning strategy session today or for additional resources regarding special needs trusts and other important matters.