Special Needs Trusts
Parents and family members of a child with special needs know that a disability or any kind of physical or mental impairment can be financially and emotionally challenging, particularly if the child is severely disabled. In addition to providing the quality medical care the child needs, parents want to ensure that their child has the quality of life that they deserve if they pass away.
Although Supplemental Security Insurance (SSI) benefits and Medicaid cover many of the medical expenses associated with a disability, a special needs trust can be set up to collect and manage financial assets that can be used to supplement benefits from government programs, such as SSI and Medicaid. A lawyer can assist their client with the process of setting up a special needs trust, including creating the trust documents, selecting a trustee, and ensuring that the beneficiary’s rights are protected.
What Is a Special Needs Trust?
A special needs trust allows a person with a disability to receive financial gifts, lawsuit settlements, and other funds without jeopardizing their eligibility for benefit programs. This type of trust is specifically designed to pay for items that are not covered by a public or private benefits program, including recreation activities, counseling, camps, and other expenses that go beyond meeting one’s basic needs. It may also include other expenses, such as certain medical and dental costs, equipment, and specialized training and education.
Quality-of-life enhancements can also be made to the trust to allow the trustee to purchase electronic equipment, appliances, vacations, and make other financial decisions that can build self-esteem and improve the disabled person’s well-being. A special needs trust is designed solely for the beneficiary, so it is an effective financial management tool if an adult with special needs is unable to manage their own expenses or is at risk for being taken advantage of by a dishonest or predatory person.
What Expenses Does a Special Needs Trust Cover?
In most cases, people who have a physical or mental disability qualify for government benefits, such as SSI and Medicaid. Medicaid generally covers hospital services, doctor visits, home health services, and other health care expenses. SSI benefits cover expenses such as mortgage payments, groceries, property taxes, and utilities. The funds from a special needs trust should not be used for expenses that are already covered by these benefits. The following are examples of expenses that may be covered by a special needs trust:
- Medical expenses that are not covered by government benefits.
- Therapy and rehabilitation services.
- Training and education.
- Payments for a companion.
- Summer camps, movies, social events, and other recreation and entertainment costs.
What Are the Different Types of Special Needs Trusts?
There are three different types of special needs trusts, depending on the type of assets and management, including the following:
- First-party trust: This type of trust helps individuals who became disabled as a result of an injury. They are funded by the disabled person’s own funds and may be used for their own benefit. This is often the case if the person with special needs received a sizable inheritance or legal settlement. A first-party special needs trust allows the beneficiary to transfer their settlement and assets into the trust. This allows them to pay for future expenses while remaining eligible for their needs-based government services and programs. When the beneficiary passes away, the remaining assets may be claimed by the government in order to reimburse them for the costs paid by the government programs.
- Third-party trust: This provides financial stability for an individual who has a disability that prevents them from being able to live alone or earn an income. Whereas a first-party special needs trust is funded by the beneficiary, a third-party special needs trust is funded by a family member or another third party for the beneficiary. With a third-party special needs trust, there is no limit to the number of assets allowed in the trust, the beneficiary can use the funds for anything they need, the government has no claim on assets in the trust, and the trust will not prevent the beneficiary from being eligible for government benefits.
- Pooled trust: This is designed for people who have limited assets or for families who do not have someone who is willing or able to act as a trustee. This type of trust is administered by a non-profit organization that collects from a number of beneficiaries with special needs. Each person has their own account, and the funds are administered together in an effort to keep costs down and simplify the administration process. Pooled trusts do have the government reimbursement requirement like a first-party trust. In addition, a portion of the remaining assets must be passed on to the non-profit organization as payment for managing the trust.
According to the New Jersey Division of Medical Assistance and Health Services (DMAHS), only a parent, grandparent, guardian, or the court may establish a special needs trust in the state. In addition, the trusts may not be revoked by the grantor or donor.
When setting up a trust, there are a number of factors that will need to be considered, including the beneficiary’s age, the type of assets they are expected to have, and who will be responsible for managing the trust. In addition, the fund must be set up before the disabled person reaches 65 years old.
If the beneficiary is under 18 years old when the trust is set up, the trustee must execute a bond in order to protect the child’s funds or get permission from the court to avoid this step. The trust must also address whether the beneficiary is likely to be competent as they get older.
Who Should be Selected as a Trustee?
Selecting a trustee to manage a special needs trust is an important decision that should not be taken lightly. It is important to choose someone who is trustworthy, comfortable with managing money and assets, and who has the beneficiary’s best interests at heart. A trustee can be an individual or a corporate entity, and both are entitled to a commission for their services. Similar to a personal bank or brokerage account, certain fees will apply to accounts owned by the trust. The following provides an overview of the different types of trustee options:
- Family member: If a family member wishes to be a trustee, a lawyer will need to prepare the special needs trust. The trustee should have some financial knowledge and be willing to learn about the specific requirements and the public benefits rules of special needs trusts. They must also make sure that the funds are only used for the beneficiary’s needs and in ways that do not jeopardize their government benefits. If the trustee becomes unable or unwilling to serve as trustee, a successor must be named in order to maintain continuity of trust administration.
- Professional: Another option is to appoint a professional trustee to administer the trust. A lawyer can create a special needs trust document, or a sub-account can be established in a pooled trust. A professional trustee will monitor financial requests and prepare distributions. They will also hire a financial manager who will invest the trust assets based on the size of the trust and the beneficiary’s projected needs.
Who Benefits From a Special Needs Trust?
The main goal of a special needs trust is to maximize the financial resources available to the person with a disability and enhance their quality of life as much as possible. There are a number of people who can benefit from this type of trust, including the following:
- People who have a permanent disability. Special needs trusts are often used for people who suffer from a severe or permanent disabling condition and who will likely require assistance from SSI and Medicaid programs for their entire lives. If the disabled person is able to earn a living in spite of their disability, they may not qualify for SSI or Medicaid.
- Individuals who have special needs but whose condition may not require long-term benefits. It can be very difficult to predict the long-term impact of a disability and whether an individual will need to rely on Medicaid or SSI on a permanent basis. New treatment options, therapies, and technologies may improve a person’s condition. If the improvement is significant, they may no longer need government benefits. Setting up a special needs trust can provide peace of mind without having to worry about affecting the loved one’s inheritance. If the trust is no longer necessary, it can be terminated if doing so is in the best interest of the beneficiary.
- Someone who is not currently disabled but has a condition that is likely to progress. If someone has a condition that is likely to progress and cause the person to become disabled, they may need assistance from SSI or Medicaid at some point down the road. If there is a chance that this may happen, it is highly recommended that a special needs trust be set up as soon as possible. If it turns out the trust is not needed, it can be terminated.
- Individuals who are eligible for Medicare or Social Security Disability Insurance (SSDI) benefits. If the SSDI payments are low or certain benefits are not included in the Medicare program, SSI may supplement the person’s income. A special needs trust can also maximize the financial resources available to the beneficiary.
- Someone who is unable to manage their finances. People who do not know how to manage their money or spend recklessly can benefit from a special needs trust. People with bipolar syndrome, mild autism, attention-deficit/hyperactivity disorder (ADHD), and other mild developmental disabilities may be more prone to out-of-control spending. This type of trust can also help protect the loved one from being a victim of financial predators.
What Are the Most Common Reasons for Establishing a Special Needs Trust?
There are a number of compelling reasons why families decide to set up a special needs trust for a loved one who has a disability, including the following:
- Preserve benefits while supplementing quality of life expenses. A special needs trust allows parents to place funds in a trust that can be used to improve the child’s quality of life. The assets in a special needs trust are not counted when determining SSI and Medicaid benefits.
- Ensure that the assets are distributed appropriately. A special needs trust will ensure that the funds are used and distributed as intended. If a trust has not been established, the assets could be mismanaged by other family members who do not understand finances or do not have the beneficiary’s best interests at heart.
- Other family members may contribute. Once a trust has been set up, grandparents and other family members may contribute up to a certain limit without having to pay a gift tax or generation-skipping tax.
- May be funded using a range of resources. Individuals or families may fund a special needs trust with cash, securities, or other resources. A second-to-die life insurance policy will enable families to fund the trust without using money needed for household expenses. Another option is to transfer assets from an individual retirement account (IRA). An estate lawyer can recommend the most tax-efficient way to transfer those assets.
- Establish a pattern for fund distribution. If the special needs trust is set up when a child is young, a future trustee can refer to the record of payments that have been made as a guide for distributing future funds and paying the child’s expenses.
- Maximize the financial benefits from a personal injury settlement. If a child receives a sizable settlement from a personal injury lawsuit, a special needs trust will allow them to use the funds for non-essential expenses and provide financial security while still qualifying for public benefits.
- Provide assets after a divorce. A special needs trust will ensure that the trust is used to receive court-ordered child support that benefits the disabled child. It can also be used to set aside funds that have been earmarked for future use and list a disabled person as a beneficiary of any life insurance policies that may have been changed or revised during the divorce.
New Jersey Estate Lawyers at Lyons & Associates, P.C. Help Clients Form Efficient Special Needs Trusts
If you wish to establish a special needs trust for a family member who has a disability, do not hesitate to contact our New Jersey estate lawyers at Lyons & Associates, P.C. We will assist you with every step of the process, including establishing who should act as trustee and the type of trust that best meets the beneficiary’s needs. To schedule a free consultation, call us today at 908-575-9777 or contact us online. Located in Somerville and Morristown, New Jersey, we serve clients throughout Somerset, Woodbridge, Morristown, Parsippany, Rockaway, Short Hills, Chatham, Randolph, Madison, and Morris Plains.