Special needs trust

PostedNovember 24, 2022

UpdatedJanuary 10, 2023

Byidfuiveirbuwoikwx

Summary

A special needs trust is a legal fund that gives income to a person who is chronically ill or physically or mentally disabled. This article explains how a special needs trust works and the three kinds of special needs trusts.

What is a special needs trust?

A special needs trust is a legal fund that gives income to a person who is chronically ill or physically or mentally disabled. Unlike with normal income, the person can receive this income and still be eligible for public benefits such as Social Security, Supplemental Security Income (SSI), and Medicaid.

In terms of receiving public benefits, a person who is chronically ill is also considered disabled if they are unable to perform at least two actions required in normal day-to-day living, such as feeding or dressing themselves, for at least 90 days in a row. If a chronically ill person needs someone else to be present to protect them from threats to their health and safety, they also are considered disabled.

The money from a special needs trust can only be used for the benefit of the person who is ill or disabled. It is typically used to cover costs such as medical expenses, caretaker salaries, and personal items. It should not be used to pay for food, prescription medication, and housing, as these are covered by public assistance, and the person might end up losing their benefits if they use trust money instead. ¹

How does a special needs trust work?

A special needs trust owns the assets that are placed in it, such as money, property, or stocks. Once these assets are transferred by the person who set up the trust (called the trustor, grantor, or settlor), they technically belong to the trust, not the trustor or the beneficiary. A third party, called the trustee, manages the trust and oversees the distribution of the income.

Money from the trust is not a type of income that the government counts when it calculates whether a person who is chronically ill or disabled has a low enough income to qualify for Social Security, SSI, or Medicaid. For this reason, the person who receives trust money will be just as eligible for these public-assistance funds as they were before they received the money.

The fact that the assets are owned by the trust also means that they cannot be taken by creditors or people who win a lawsuit against the trustor or the beneficiary.

What kinds of special needs trusts are there?

There are three kinds of special needs trusts: first-party; third-party; and pooled. First-party and third-party trusts must be created and funded when the ill or person with a disability is under 65 years old. A pooled trust is created and run by an organization. It can be created when the beneficiary is already 65 or older.

First-party special needs trust

With a first-party special needs trust, the assets belong to the person with special needs. For example, a person who is chronically ill or has a disability might have inherited money and property or won a lawsuit and want to put these assets into a trust so that they don’t lose their Medicaid and Social Security benefits.

This kind of trust is also called a “self-settled” trust, because the person who supplies the original money or other assets is also the person who receives the income. However, any person who is legally and mentally competent can create the trust, using the assets of the person with special needs.

A first-party special needs trust is irrevocable. This means that once it is created, it generally cannot be changed or ended. This kind of trust is often called a “payback trust,” because when the beneficiary dies, money in the trust must first be used to repay the state’s Medicaid division for any expenses the person has cost it. If there is any left over after Medicaid has been repaid, it usually goes to the beneficiary’s estate.

Third-party special needs trust

With a third-party special needs trust, the assets that get transferred into it belong to someone besides the person who is ill or disabled. This kind of trust is often created by parents for their children with special needs, but grandparents, a sibling, or anyone else can also create it.

Another common scenario is for parents, grandparents, or a spouse to leave an inheritance or the payout from a life-insurance policy to a special needs trust instead of directly to the person who is chronically ill or disabled. This way, the person remains eligible for public benefits.

When the main beneficiary of this kind of trust dies, the remaining money goes to other beneficiaries named by the person who originally set up the trust.

Pooled special needs trust

With a pooled special needs trust, a non-profit organization creates and runs the trust instead of individuals. The organization combines and invests the assets of multiple people, in order to maximize the investment income from the trust. It also makes sure that the trust is being run according to the rules for Medicaid, SSI, and so on.

Even though the money in a pooled trust is combined for investment purposes, all the individual accounts are maintained, and each person gets the income from their own account.

Related information

Assets and liabilities

Asset protection trust

Charitable trust

Creating legal documents

Engaging an attorney

Estate and inheritance taxes

Financial plans versus estate plans

Life insurance trust

Overview of estate plans

Overview of trusts

Protecting assets from mishandling