When a loved one has a disability, a special needs trust can provide for services and care without affecting benefit eligibility.
When you raise and care for a child with special needs, your biggest worry is probably what happens once you are gone. The Census Bureau reports that 56 million Americans have some form of disability. Autism spectrum disorders, for instance, affect one in 68 U.S. children, according to estimates from the Centers for Disease Control and Prevention.
Setting up a special needs trust as part of an estate plan provides peace of mind. Most disabled individuals receive government benefits through Supplemental Security Income – currently $721 per month – and/or Medicaid. These benefits generally cut off when a special needs recipient has assets totaling more than $2,000. Listing a disabled child directly as the beneficiary of a 401(k) retirement account or an insurance policy thus affects benefit eligibility.
In 1993, Congress passed a statute that excluded certain trust assets from consideration as resources for SSI and Medicaid eligibility. Self-settled and third party trusts can thus bridge shortfalls between benefits received and actual costs.
When funds that belong to the disabled child fund the trust, it is self-settled. A parent, grandparent, guardian or the court must set up this type of trust. An typical example is a parent creating a trust using the child’s insurance settlement money or an inheritance directed to the child from a grandparent.
With a self-settled trust, there is a payback provision. This means that when the beneficiary of the trust dies the government can collect the trust’s assets as repayment for Medicaid services provided during the individual’s life.
Third party trusts
With third party trusts, there is no payback provision. These can be set up and funded by anyone, but funds must not belong to the beneficiary. When a grandparent wants to leave an inheritance or give a birthday gift to a disabled grandchild, placing the funds into a trust is often a better option than a direct gift.
Extended family needs to be on the same page or gifts and inheritances could affect benefit eligibility.
Choosing a trustee
Many parents delay setting up a trust and finalizing estate plans, because the process may seem overwhelming or they do not know whom to designate as trustee. A combination of a family member and a corporate trustee can work well. The relative understands the needs of the child and the financial advisor handles management of the funds.
Frequently, a family will select a sibling as trustee. Sometimes if the relationship between a brother and sister is distant, a professional trustee removed from the emotion of dealing with bipolar disorder over the years may be preferable.
Not having a will or any estate plan poses problems, because intestacy laws may mean a disabled child inherits a portion of your estate affecting eligibility.
Making a call to an estate planning lawyer is the first step. A lawyer can answer your specific questions and draft estate documents that work together to provide for your loved one without affecting benefit eligibility.