Special Needs Trust

What Is a Special Needs Trust?

A special needs trust is a legal arrangement and fiduciary relationship that allows a physically or mentally disabled or chronically ill person to receive income without reducing their eligibility for the public assistance disability benefits provided by Social Security, Supplemental Security Income (SSI), Medicare, or Medicaid. In a fiduciary relationship, a person or entity acts on behalf of another person or people to manage assets.

A special needs trust is a popular strategy for those who want to help someone in need without taking the risk that the person will lose their eligibility for programs that require their income or assets to remain below a certain limit.

Key Takeaways

  • A special needs trust is a legal arrangement that provides access to funding to someone who is physically or mentally disabled or chronically ill without potentially jeopardizing the benefits provided by public assistance programs.
  • This trust allows for the additional financial support of an individual with special needs, without risking bumping them out of contention for disability benefits.
  • Public assistance programs set up for people with special needs are predicated on certain income and asset restrictions; money put in the trust doesn't count toward qualifying for public assistance.

How a Special Needs Trust Works

A special needs trust covers the percentage of a person's financial needs that are not covered by public assistance payments. The assets held in the trust do not count for the purposes of qualifying for public assistance, as long as they are not used for certain food or shelter expenditures. Proceeds from this type of trust are commonly used for medical expenses, payments for caretakers, transportation costs, and other permitted expenses.

The party who creates the trust will designate a trustee who will have control over the trust. This trustee will also oversee its management and the disbursement of funds. Assets originally belonging to the disabled individual that are placed into the trust may be subject to Medicaid's repayment rules, but assets provided by third parties such as parents are not. This type of trust is sometimes also called a "supplemental needs trust."

Special needs trusts are irrevocable—neither creditors nor the winner of a lawsuit can access funds designated for the beneficiary.

Benefits of a Special Needs Trust

Establishing a special needs trust can have benefits for both parties. The beneficiary has a way to receive financial support without putting their eligibility for income-restricted programs or services in jeopardy. Meanwhile, the person or party that creates the trust has some reassurance that the proceeds will go to expenses they stipulate.

When a third party puts money in a special needs trust, the party is assured that the money will be used for its intended purpose. For example, parents might put assets in a special needs trust to provide for their disabled child instead of giving that money to their other children. Special needs trusts are irrevocable, and their assets cannot be seized by creditors or by the winner of a lawsuit.

It is important that the person who creates the trust or their legal representative words the terms of the trust documents very carefully to ensure its validity, and to confirm that the directives and purpose of the document are explicitly clear. The special needs trust must be established before the beneficiary turns 65.

Whom Does a Special Needs Trust Benefit?

A special needs trust is a trust that is designed to benefit someone who has a mental or physical disability or a chronic illness. It is set up in such a way that the disabled or ill person won't lose out on benefits from Social Security, SSRI, Medicaid, and other public-assistance programs that are income sensitive.

What Kind of Assistance Does a Special Needs Trust Benefit Provide?

In order for the money in this kind of trust not to jeopardize a recipient's eligibility for public assistance funds, it can only cover financial needs that aren't covered by those funds. This means the trust money cannot be used for food or housing expenditures. Typically, it is used to pay caretakers, medical expenses, and the cost of transportation as well as other allowed expenses.

Is a Special Needs Trust a Revocable Trust?

No, this type of trust is an irrevocable trust. That means it cannot be modified, amended, or terminated without permission from the grantor's beneficiaries. The assets in a special needs trust can't be seized by creditors or by someone who wins a lawsuit.

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  1. U.S. Social Security Administration. "SI 01120.203 Exceptions to Counting Trusts Established on or after January 1, 2000."

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