Special Needs Trusts


Do I Need A Special Needs Trust?

If you are a parent with a child who has disabilities, then a Special Needs Trust is something you should consider putting into place to protect the child. Parents who do this recognize the possibility that state aid for the child could be immediately discontinued, should the child inherit a sum of money, which would then disqualify them from state aid.

How Does A Special Needs Trust Affect Supplemental Security Income and Medicaid?

The above government programs are important to children with disabilities. They allow for medical coverage, cash benefits, long term support, as well as other services available now and in the future.

If you are applying on behalf of a disabled child, your income and financial holdings will be taken into consideration. The same holds true, if a disabled child inherits financial income from an estate.

If a family of a disabled child or an individual child who is currently disabled, have income over the qualifying limits then these services could be cut off. Currently the allowable limit for assets owned by a disabled child is set at $2,000. If the child or the family goes over this limit, as would be the case if an estate is inherited, it would then put the disabled person at risk of losing their Supplemental Security Income and Medicaid coverage.

Unfortunately, the current level of funding received from the government only meets the basic needs of the disabled person. This funding is well below the federal poverty line. It also does not provide for other needs the child may have now and in the future, which will enhance the quality of their life.

This creates a serious dilemma for any parent of a disabled child. Parents, while alive, provide the “extras” their child needs. When parents are no longer alive, it’s important for other arrangements to be made with regard to their assets. Assets can put the disabled child at risk of losing government support. If the parents leave assets to a family member or another person who will care for the child, it then puts the child’s assets at risk, in the case of a divorce, family bankruptcy, financial mismanagement or lawsuits.

The government has now put rules in place, within certain parameters, which allow assets to be held in trust for a disabled child who receives Supplemental Security Income and Medicaid. The trust is known as a Supplement Needs or Special Needs Trust.

The above trusts will allow the disabled child to keep their benefits from the government, and at the same time have funds available for their other needs. A Special Needs Trust will provide the money for these needs.

A Special Needs Trust can be specifically designed by your lawyer to supplement the government’s benefits, and meet the child’s other needs. Money that is in the trust is not given to the disabled child, but instead is distributed to people deemed third parties, who then provide the necessary funding for the needs of the disabled person.

A Special Needs Trust may not be distributed directly to the disabled person, but can be used for a variety of different expenditures that include:

  • Dental Needs
  • Medical Needs
  • Education
  • Caregivers
  • Services not provided by Medicaid

There is a long list of items which can be purchased on behalf of the disabled child, and you should discuss this thoroughly with a legal representative with extensive knowledge in this specific area.

What is the Right Time to Setup a Special Needs Trust?

Setting up a Special Needs Trust should be done as soon as possible, in order to protect the child if something happens to the parents or guardian. You should speak with a lawyer as soon as you know your child is disabled.

How Does the Setup of a Special Needs Trust Work?

There are laws which govern trusts, and the complexity of these laws requires the advice of a legal professional. As well, changes to different programs and legislation, both in the state of California and out of area states, need to be reviewed at all times.

Your legal representative should have extensive knowledge of the different types of legislation and changes, in order to help you ensure the disabled child is provided for. Your lawyer is the best person to rely upon for any changes that need to be made to the Special Needs Trust.

If the disabled child is to inherit assets from a person’s Will, these assets should be put into the Special Needs Trust. The trust may also be funded while parents are alive, through a number of different legal documents. A disabled child does not need to be left out of a will, but their inheritance should be put directly into the trust. In most cases, anything coming to the child should be put into the Special Needs Trust by having the trust named as the beneficiary.

In some situations, a lawyer will recommend that an Irrevocable Trust be used for a disabled child. Making the trust irrevocable will help to protect a disabled child, and is funded during the parent’s lifetime, or when they die and the funds are distributed to the trust.

The government entities that administer Supplemental Security Income and Medicaid, will evaluate a trust which has been setup for a disabled individual, so they may determine if the resources in the trust are to be taken into consideration when qualifying for these benefits. For this reason, an Irrevocable Trust is a good legal vehicle to ensure the funds in the trust cannot be counted as a resource of the disabled person. If a trust fund is revocable, then the funds would be counted as a resource by the government.

How is the Special Needs Trust Managed?

The trust must have a “Trustee” appointed, who will then manage the disabled child’s trust for them. This can be a lawyer, bank, institution or an individual person. They are given full discretion to manage the child’s money and for decisions related to how it is distributed for the benefit of the disabled child. It should be designed in a way that directs the trustee in how the resources should be used for the child’s specific needs.

It’s important to choose a trustee who has a good understanding of financial instruments, as well as solid money management skills. The trust needs to be designed in a way that it can be managed for a long period of time, and the choosing of a trustee should take this fact into consideration. The trust should also allow for the trustee to be removed or changed for any reason at any time.

When the disabled child dies, the trustee will handled the final arrangement, and at that time the Special Needs Trust ends. If laws are changed or if the government challenges the Special Needs Trust, the trustee should be allowed to terminate the trust if deemed necessary.

Changes to the Law Over the Lifetime of the Special Time

Over time there will always be changed made to the laws by the government, and it’s important that your lawyer knows of these changes and advises you on how they will affect the trust. In 1993, the Omnibus Budget Reconciliation Act was introduced. It was designed to either penalize or discourage people in middle to upper income brackets from giving away or selling assets to their heirs, while at the same time, accessing Medicaid in order to pay for long term care for themselves. By giving away assets, they then qualified for government help. This act sets up disqualification timelines in which a person, trying to access Medicaid, was disqualified from receiving government help, since their assets were to be counted as their own resources. The disqualification timeline now is set at 3 years if the gift was outright, and 5 years in the case of assets transferred to a trust. In some cases it may be more than 5 years.

For parents of a child with a disability, this presented a unique problem, which Congress recognized and setup special provisions in the law, if the parent was transferring any assets to a trust for the benefit of a disabled child. They deemed that assets, which were being transferred to a Special Needs Trust by a parent or other persons, were allowed under specific circumstances, and by doing so it would not affect their eligibility for Medicaid.

In 1999, the Foster Care Independence Act stated that a trust, which was established and funded for a disabled child, would not be considered a resource when applying for SSI. Monies put into a trust would not be considered income. When qualifying for SSI the new law follows the guidelines set out in qualifying for Medicaid, so that individuals will not be penalized for funding a Special Needs Trust, as long as all conditions are met, just as they must be with Medicaid. The new provisions became effective for any trust which was established after January 1, 2000.

For these reasons, it’s important for anyone funding a Special Needs Trust to have guidance from a lawyer, who has a thorough understanding of both federal and state laws. State guidelines are more stringent than those imposed by the federal government.