Thanks to medical science, longevity has increased. Most people take this as good news, but this change has pushed society's demographics in directions that were difficult to envision even a generation ago. Retirees can now often expect to live for another 20 or even 30 years after they stop working, which brings a relatively greater chance of disability at some point. This has created a growing demand for sound financial planning for those who become disabled, particularly in cases of permanent disability. Find out how a trust may help your future plans if you or someone you love is living with a special need or disability.

A New Era of Planning
The financial needs that come with mental disability have lead to the development of a new type of trust that can provide special benefits to its recipients without reducing their eligibility for governmental aid. This is a critical issue, especially for persons with disabilities who qualify for long-term care and/or nursing home benefits under the Supplemental Security Income or the Medicaid program. This type of trust, known as either a special needs trust or supplemental needs trust, is often established upon the receipt of either an inheritance or a legal settlement in order to allow for the additional receipt of governmental benefits. There are several types of aid that people with disabilities may be eligible for, such as:

  • Social Security retirement: Social Security is available to people with disabilities without regard to their current income and/or assets.
  • Supplemental Security Income: Qualified recipients who have not contributed adequately to their Social Security plans and have few or no assets are eligible for this program. However, their income and assets cannot exceed a certain amount, with some exceptions. In general, assets above $2,000 for a single person and $3,000 for a couple will result in disqualification. Income must be below the approved threshold as well, which is determined according to the rules of the Social Security Administration (SSA).
  • Medicare: Recipients must be eligible for Social Security benefits as either retirees or under the above named characteristics to qualify for Medicare.
  • Medicaid: Recipients must qualify for Supplemental Security Income benefits in order to be eligible. (To read more, see What's The Difference Between Medicare And Medicaid? )
Furthermore, federal guidelines mandate that the majority of those with disabilities who have a source of income and also receive public assistance must foot part of the bill for their own care.

Trusts allow the grantor (the person who establishes the trust) to mandate that the trustee not use the assets of the trust to replace any government aid that will be received, such as Medicaid. The trustee in these cases may only use income generated by the trust to pay for expenses that will not be covered by government benefits. Essentially, these trusts are useful for providing effective coordination between governmental and private funding sources, so that neither source impedes the other.

Special needs trusts can generally be funded with a wide range of assets, such as stocks, bonds, mutual funds, annuities, cash-value life insurance, personal property or even real estate. Cash-value life insurance can be especially beneficial because of the tax-free death benefit that avoids probate. Furthermore, the cost of the premiums may often be the only way that the family of a person with disabilities may be able to fulfill the need for long-term trust funding. (To learn more, see Skipping-Out On Probate Costs.)

Once the death benefit is paid to the beneficiary with the disability upon the death of the insured, the trustee can use the proceeds to create an appropriate portfolio that will provide an appropriate level of income for the beneficiary in the years to come. However, if the donor is not insurable, an annuity can be substituted for a life insurance policy, despite its reduced leverage and tax efficiency.Unlike life insurance, annuity income is taxed as ordinary income. Annuities also do not pay out a benefit greater than their accumulated values.

Private Vs. Public Trusts
The grantors of most special needs trusts generally have the option of choosing either a private or public trustee to run the trust. Private trustees are generally family members, while a public trustee is often a financial professional that has been appointed by the court. In many cases, both private and public co-trustees are chosen by the grantor, as this allows one trustee to be a trusted family member that knows the needs of the disabled beneficiary while the other (public) trustee invests the assets and handles the administration of the trust. Of course, if no private trustee is named, then the court will always appoint someone to this position. (Keep reading about this subject in Can You Trust Your Trustee?)

Special needs trusts are complex instruments with rules that vary from state to state. A qualified and experienced attorney should always be used when drafting one of these instruments, and care should be taken to ensure that the trust is structured so as to provide the greatest possible coordination between income generated from the trust assets and any and all possible governmental aid that is available. In order to find out more about these trusts, contact your estate-planning attorney or financial advisor.

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