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Special Tools for Special Needs

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Many families include someone who lives with a chronic illness or a physical or mental disability and requires extra care or supervision. Along with those challenges often comes the need for careful, thoughtful financial planning. Many individuals in these situations qualify for public assistance programs such as Social Security, Medicaid, or state-level benefits.

In some cases, family members also have the desire—and the financial ability—to help support their loved one. However, because many public assistance programs, including Medicaid, are based on financial need, providing that help can be complicated. Well-intentioned financial support can unintentionally cause a person to lose eligibility for important benefits.

One way to address this challenge is through a special needs trust. A special needs trust is a legal arrangement designed to provide additional financial support to a person with a disability or chronic illness without jeopardizing their public benefits.

The trust involves at least three parties:

  • The grantor, who creates and funds the trust
  • The beneficiary, who has special needs
  • The trustee, who manages the trust assets and makes distributions on the beneficiary’s behalf

In some cases, the grantor may also serve as the trustee or even be the beneficiary. With a special needs trust, the assets and income belong to the trust—not the beneficiary—which allows the beneficiary to continue qualifying for federal or state assistance programs.

The legal rules governing special needs trusts are complex. A qualified attorney is required to properly establish the trust, and a knowledgeable trustee is needed to administer it in compliance with both the trust document and applicable laws. The goal is to supplement, not replace or disrupt, public assistance benefits. Because of these requirements, the cost to set up and maintain a special needs trust can be significant.

There are also strict limits on how trust funds may be used. Trust assets cannot be used to pay for expenses already covered by government benefits, including food and housing. They also cannot be used to pay property taxes, utilities, gift cards, or cash gifts. However, trust funds may be used for many other purposes, such as medical care not covered by Medicaid, caregiver expenses, transportation, legal costs, insurance, burial expenses, special therapies or equipment, and educational or recreational activities.

There are 3 types of special needs trusts.

The first, a third-party trust, is funded by anyone other than the beneficiary. The trust can be revocable or irrevocable, with those that are irrevocable providing some asset protection against the beneficiary’s and grantor’s creditors. Any assets remaining in the trust at the beneficiary’s death flow to the remainder beneficiaries designated by the grantor in the trust document.

The second type of trust, a first-party trust, is funded solely by the beneficiary. In contrast to a third-party trust, which have no beneficiary age requirement, first-party special needs trusts must be established before the beneficiary’s 65thbirthday. They must be irrevocable in nature, which again provides asset protection against any creditors. Generally speaking, assets remaining in the trust flow to the heirs of the beneficiary’s estate, but first Medicaid may need to be reimbursed by the trustee for any state benefits the original beneficiary received. Such Medicaid reimbursement is notrequired of third-party special needs trusts.

The third type of trust, a pooled special needs trust, are typically set up by charities and use professional trustees. Individuals can open a “sub account” with these charities under the pooled trust to obtain some of the same benefits as a full first- or third-party trust without the same trustee responsibilities or reporting and cost burdens. Pooled trusts can be more economical, as the operational costs are spread out among the various sub accounts.

A potential alternative or addition to a special needs trust, ABLE (Achieving a Better Life Experience) accounts can also provide some financial means for the benefit of a disabled or blind person. Available since 2014, ABLE accounts are easier to set up, manage, and access. They also have a wider range of qualifying expenses that can be paid from the account. They can be owned or managed by the beneficiary, without the involvement of a trustee. Although the beneficiary must have been disabled or blind prior to turning age 46 (previously age 26), the ABLE account can be set up later in life. Unlike special needs trusts, ABLE accounts have annual contribution limits and may also have maximum balance limits set by the beneficiary’s state, which if exceeded could jeopardize the beneficiary’s Social Security income. Funds in an ABLE account grow tax-free and can be withdrawn tax-free provided they pay qualified disability expenses. As with third-party special needs trusts, any balance in an ABLE at the beneficiary’s death may need to help reimburse the state for Medicaid services provided during the beneficiary’s life. Finally, ABLE accounts and special needs trusts are not exclusive: the same person can be a beneficiary of both arrangements.

The ability to help provide financial support for oneself or a loved one living with a disability, or chronic illness is a blessing. However, the rules surrounding public benefits make careful planning essential. If you or someone in your family needs guidance in this area, consider speaking with your trusted advisor or a qualified special needs attorney for professional support.

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