What Is a Special Needs Trust?

If you have a child, spouse, or another loved one in your family with special needs, you know how important it is to ensure financial security for their future. Their ability to work and earn an income for themselves may be restricted, and they may rely on public benefits to help them afford essential needs, such as food, housing, and medical care.

Their eligibility to receive this kind of assistance from the government is as crucial as it is fragile: Without proper estate planning on your part, a well-intended inheritance can disqualify them from Supplemental Security Income, Medicaid, and low-income housing benefits. Rest assured, however, that you can leave an inheritance behind in a special needs trust to support a loved one living with a disability without jeopardizing their eligibility for public benefits.

Special needs trusts are typically irrevocable, which means a few important things:

  • You cannot change the terms of the trust
  • You cannot remove property funded into the trust
  • Property in the trust is not subject to estate taxation upon your death
  • Your creditors cannot claim assets and property held by the trust

There are also three commonly used types of special needs trusts: First-Party Trusts, Third-Party Trusts, and Pooled Trusts.

First-Party Trusts

These types of trusts are useful if a loved one with a disability has assets of their own worth preserving. As such, they are often used for people who received a personal injury settlement.

By moving the settlement and their remaining assets into a First-Party Trust, the person with special needs can maintain their eligibility for public benefits while using the trust’s property as additional financial support. When the beneficiary with special needs passes away, the remaining property in the trust is used to reimburse the government for their use of public benefits.

Third-Party Trusts

Parents typically create Third-Party Trusts to support their children with special needs, although any other family member with special needs may be designated as a beneficiary. The trust is funded as any other would be, meaning that cash, bank accounts, and other property can be titled to it for the beneficiary’s use – also without affecting their public benefits eligibility.

An important distinction from a First-Party Trust is that a Third-Party Trust doesn’t require reimbursing the government for the beneficiary’s use of public benefits. Also, a successor beneficiary may be named to inherit the trust’s remaining property when the primary beneficiary dies.

Pooled Trusts

A pooled trust is much different from the former two types of special needs trusts. This type of trust is established by a nonprofit organization that pools the financial resources of multiple beneficiaries and invests them. Each beneficiary is provided a separate account to receive disbursements without affecting their eligibility for public benefits.

When the beneficiary dies, a portion of the money in their account is used to reimburse the government for their use of public benefits. The remaining portion is considered a charitable donation to the nonprofit that managed the pooled trust.

Do You Want to Protect Someone with Special Needs?

If you have a loved one in your life with special needs, you can help them guarantee their financial security and afford the care they need. Learn more by speaking with our attorney at Norton Health Law.

Schedule a consultation by contacting us online or calling (434) 216-4020.

Categories