Caring for a loved one with disabilities can come with financial challenges. If your family member can receive government benefits like Supplemental Security Income (SSI) or Medicaid, you might worry that leaving them an inheritance could disqualify them from these essential programs. This concern affects thousands of families who want to provide additional support to loved ones without jeopardizing crucial benefits.
Fortunately, a specific type of trust offers a solution. A special needs trust (SNT) is a legal tool that holds assets for individuals with disabilities without impacting their eligibility for government assistance. These trusts work by providing supplemental support beyond what government programs cover.
When you ask, “What is a special needs trust?” the simple answer is that it’s a financial safety net. The trust holds money and assets that can pay for items and services like education, recreation, therapy, and comfort items that improve quality of life.
If you’re ready to learn more about special needs planning and how this type of trust can support your loved ones, continue reading.
How Do Special Needs Trusts Work?
Special needs trusts operate under strict guidelines that protect government benefit eligibility. The trustee, who manages the trust, cannot make direct cash payments to the beneficiary. Instead, they purchase goods and services directly or reimburse third parties for approved expenses.
This structure ensures that trust assets don’t count as the beneficiary’s resources (for benefit eligibility purposes). Government agencies view properly structured special needs trust distributions as third-party assistance rather than the beneficiary’s income. This preserves their access to programs like SSI, Medicaid, and housing assistance.
What Special Needs Trusts Can Cover
Special needs trusts can pay for a wide range of items and services that enhance the beneficiary’s life. Common allowable expenses include:
- Medical and dental care (not covered by public benefits)
- Therapeutic equipment and services
- Educational programs and tutoring
- Recreational activities and entertainment
- Travel and transportation costs
- Home modifications for accessibility
- Specialized clothing and adaptive equipment
- Electronics, computers, and communication devices
- Furniture and household items
- Legal and advocacy services
- Counseling and therapy
The trust can also cover comfort items and other personal belongings that improve daily living. However, understanding what special needs trusts cannot cover is equally important for proper planning.
What Can a Special Needs Trust Not Cover?
Special needs trusts have specific restrictions to maintain government benefit eligibility. Some expenses not covered by SNTs include:
- Utilities, such as electricity, gas, and water
- Basic food and shelter costs
- Gifts and tips for others
- Charitable contributions
- Rent, mortgage payments, property taxes, etc.
These restrictions protect benefit eligibility while ensuring funds provide supplemental support. Direct cash payments to the beneficiary from the trust are also not allowed.
Types of Special Needs Trusts
Understanding the different types of special needs trusts helps you choose the right option for your situation.
Third-Party Special Needs Trusts
What is a third-party special needs trust? These types of special needs trusts are funded with assets from someone other than the beneficiary. Typically, that is the parents, grandparents, or other family members.
Third-party SNTs offer the most flexibility and don’t require payback provisions to Medicaid upon the beneficiary’s death. Family members can contribute to third-party trusts during their lifetime or through their wills. These trusts provide maximum protection for government benefits while allowing families to leave meaningful inheritances.
First-Party Special Needs Trusts
What is a first-party special needs trust? A first-party special needs trust, or self-settled trust, contains assets that belong to the person with the disability. Typically, the beneficiary has received a legal settlement, inheritance, or other windfall that could jeopardize their government benefits.
First-party trusts must include a Medicaid payback provision. This means any remaining trust assets upon the beneficiary’s death must reimburse Medicaid for benefits received. Despite this requirement, these trusts still provide benefit protection and enhanced quality of life during the disabled individual’s lifetime.
Pooled Special Needs Trusts
What is a pooled special needs trust? Pooled special needs trusts are managed by nonprofit organizations that pool resources from multiple beneficiaries. Think of it as a master trust that combines many beneficiaries’ funds while maintaining separate accounting for each person.
Pooled trusts accept both first-party and third-party contributions and provide professional management without requiring family members to serve as trustees. They’re particularly useful for people with limited assets or those who want professional trust administration.
Setting Up a Special Needs Trust
Creating a special needs trust requires careful planning and legal guidance. The process starts by figuring out which type of trust is best for your situation. This depends on funding sources and family circumstances.
Choosing the right trustee is also crucial, as they’ll manage the trust and make distribution decisions. Family members can serve as trustees for third-party trusts. However, legal professionals or organizations may be better suited for complex situations or when no family member is available.
Funding the trust requires careful consideration of timing and methods. Some families fund trusts immediately, while others use estate planning documents to direct assets to the trust upon death. The funding approach will depend on your financial situation and immediate needs.
Our experienced will and trust attorneys can help you through every step. From drafting trust documents that comply with federal and state requirements to ensuring long-term financial support for loved ones with special needs, you can depend on Koch & Associates.
Protect Your Loved One’s Future With an SNT
Special needs trusts preserve eligibility for government benefits while enhancing the quality of life for people with disabilities through supplemental support. Whether you need a third-party trust for family planning or a first-party trust to protect assets, these tools offer financial security.
At Koch & Associates, we help create special needs trusts tailored to the unique needs of our clients. Our attorneys have over 50 years of combined legal experience. We help people throughout Illinois with all of their estate planning needs. We also offer bilingual services for both English and Spanish-speaking clients and their families.
Contact us today to schedule a consultation and learn how we can help secure your loved one’s future.
