Families who have children or grandchildren with mental or physical disabilities face particular challenges if they want their children to be eligible for government financial assistance once they turn age 18, while also having access to additional financial resources to help them pay for things that government assistance does not cover. Working with an attorney to set up a special needs trust, and then properly funding that trust, can help to solve that problem.
Key financial challenge
Social Security's Supplemental Security Income (SSI) program for the disabled is a means-tested program. As a result, a disabled SSI recipient must have little or no income or assets. If well-meaning parents or other family members give or leave assets to a disabled person, it could make him or her ineligible for government financial assistance.
Solution
A special needs trust, sometimes called a supplemental needs trust, can hold and protect financial assets for the benefit of a disabled beneficiary without jeopardizing support they receive from government benefits, such as Social Security, Medicaid, vocational rehabilitation, subsidized housing or other needs-based benefits.
Be aware there are different types of special needs trusts, including:
- First-party special needs trust: Holds assets that become the property of someone with special needs as the result of a legal settlement or inheritance.
- Third-party special needs trust: Holds assets contributed by others who want to help an individual with special needs.
Beneficiary / life insurance considerations
To protect the beneficiary, the special needs trust, not the disabled person, should be listed as the beneficiary for life insurance policies, annuities, Individual Retirement Accounts (IRAs), and other retirement plans. Parents may consider funding the trust with additional permanent life insurance to help care for their disabled child after they are gone.
Potential benefits of a trust owning a life insurance policy include:
- Receiving any cash value accumulation and the life insurance death benefit income-tax free
- Excluding the death benefit from the value of the parents’ estate for federal estate tax purposes
- Providing the trust with a death benefit that is significantly greater in value than the cost incurred to pay premiums on the policy
Estate planning considerations
The special needs trust, not the disabled person, should also be named in the wills and trusts of the parents, siblings, or other family members intending to bequeath assets to the disabled person. If the disabled person receives an inheritance directly from any source, including well-meaning extended family, it could also adversely affect the disabled person’s eligibility for government benefits.
How to implement
An independent trustee should administer the trust, and any payments should be made directly to service providers and not to the disabled person or that person's family. The trust should have spendthrift provisions to protect its income and assets from claims of the disabled person's creditors. A special needs trust is generally irrevocable, although a carefully drafted trust document can include provisions for dissolution or termination under certain circumstances. A special needs trust can be created at any age.
How to get started
Discuss with your attorney whether a special needs trust makes sense for you. Your attorney can then work with your tax advisor and Wealth Advisor to set up and implement the trust.