Creating a Special Needs Trust

When you are providing care for a child or loved one with special needs, one of your concerns is how to continue to care for that person financially when you're no longer around. One way to get around this is by creating a special needs trust. Leaving money or other assets may make the person ineligible for government benefits such as Supplemental Security Income (SSI) and Medicaid. 

How does a special needs trust work?
Instead of leaving money directly to your loved one in your will, you set up a special needs trust. You name a trustee who will be responsible for administering the trust property and spending the money for the care of your loved one.

Under this arrangement, the trustee cannot give money directly to your loved one but can spend it for professional care, housing or other needs. Special needs trust funds can be used to pay for medical and dental expenses, physical rehabilitation, personal care attendants, education, recreation, vehicles and home furnishings.

It's important to set up a special needs trust so that it supplements available public benefits. If too much money is available, your loved one may become ineligible for government assistance. In addition, it's essential that your loved one does not have direct control over the assets or the income they generate. Only the trustee may have the ability to manage and distribute the assets.

Effects on eligibility for assistance
Since the person with special needs does not control the money, the property in the trust is ignored for purposes of SSI and Medicaid eligibility. Your loved one is only considered the beneficiary of the trust, not the owner of the assets.

The Social Security Administration reduces SSI payments if an individual receives more than $2,000 in income annually. Money paid directly from the trust to the providers of medical care, education and entertainment does not reduce SSI payments. Money paid directly to providers of food, clothing and shelter within certain limits also does not reduce SSI payments. Money paid directly to your loved one from the trust will reduce SSI payments and may affect eligibility for other assistance programs, such as Medicaid.

A special needs trust can be revocable or irrevocable. A revocable trust allows you to make changes as you go, but it becomes part of your estate. If your estate is subject to any lawsuits, taxes or other claims, you run the risk of losing your special needs trust. An irrevocable trust locks up your assets. You can't move assets back out of an irrevocable trust, but they are protected from estate taxes, legal judgments and creditors.

Managing children's feelings
In many cases, parents will simply leave assets to a healthy child and direct him or her to decide on care for a special needs sibling. While this satisfies SSI needs by keeping the money out of the hands of the special-needs child, it also puts the healthy child in the awkward position of deciding what care is needed and how much to spend. Some children may welcome this responsibility, others may resent it.

The funds could also be subject to claims by creditors and may be at risk in the case of the healthy child's divorce, bankruptcy or death. Another potential concern may be that even a loving and caring sibling is just not very good at managing finances.

One way to alleviate some of these concerns, as well as any possible hard feelings when more assets are left to a special needs child, is to set up the special needs trust for your special needs child as an inter vivos trust, while you are living, rather than a testamentary trust, which takes effect upon your death.

By doing this, you can show the siblings and future trustees of the special needs child the types of care that are appropriate and how much money is involved. This also gives other relatives the chance to make contributions or leave an inheritance for the special needs child without jeopardizing eligibility for government benefits.

An inter vivos special needs fund sets the parameters for a more secure future for the child. There will already be a precedent that sets guidelines for future trustees to follow, and there will be no interruption in care, which could occur while an inheritance you leave in a will is passing probate.

By setting up the special needs trust as an inter vivos trust, you can choose a trustee while you are living. If you decide to name one or more siblings as trustees, you should consider compensating them in the same way you would for a professional trustee.

If your special needs trust is a relatively modest amount, you may want to consider a master trust, in which the individual special needs trusts of various people are grouped together under the umbrella of a larger trust fund managed by a nonprofit organization or other group. This will ensure that the funds are managed properly, and the organization will serve as an advocate for your special needs child and look after his or her best interests.

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