Special Needs Trust: What Expenses Can It Pay For?

Estate Planning Advice
for Every Stage of Life.

Special Needs Trust: What Expenses Can It Pay For?

A special needs trust or a supplemental needs trust can be established to help a disabled individual who is receiving assistance from the government — or is eligible to receive it. Disabled people, who cannot support themselves and rely on government assistance, are not allowed to have more than a certain amount of personal assets, so family members can’t just give them money to pay for just any expenses. The use of a trust can pay for some expenses and keep the disabled person from being disqualified from receiving public assistance, including Medicaid or Supplemental Social Security, because he or she has acquired too much money.

Let’s say you are appointed to be a trustee of a special needs trust or supplemental needs trust. Or perhaps you are a beneficiary of such a trust or you want to set one up for a loved one. In these cases, you want to know what permissible expenses the trust can pay for without losing governmental support. This article will address the products, services and debts that a trustee can pay for a beneficiary — and which expenses are not permissible.

Quick Overview of Special Needs Trusts

If someone is deemed incapacitated or disabled, and is receiving governmental assistance such as Medicaid or SSI, the law allows for the creation of an irrevocable trust. This is also true if an individual is disabled and eligible for public assistance but has not yet applied for it. A special needs trust is funded by either a third party (such as a parent) or from the applicant under certain circumstances so that a designated trustee can pay for some expenses of the applicant without him or her losing the governmental assistance.

Assets can be held in the trust and used to pay for the beneficiary’s special or supplemental needs, which the government does not provide. Meanwhile, Medicaid could be paying the significant medical bills for the individual and SSI could be used to pay for food and shelter. If the medical assistance provided during the individual’s lifetime does not turn out to be costly, then upon the death of the beneficiary there is a chance that assets may be preserved in the trust and pass to loved ones. It is important to plan carefully with your estate planning attorney because in some cases the remaining assets could revert to the government under a “payback clause.”

Families can also use special needs trusts to shield excess income for Medicaid purposes. By using a trust in this way, a disabled Medicaid recipient can actually keep the benefit of almost all of his or her income under certain circumstances, rather than having to pay a portion of it towards the cost of his or her care.

Types of Expenses Allowed to Be Funded

Generally, a trustee of a special needs trust could use the money without penalty to pay for:

      • Medical and dental care not paid by other sources;
      • Private rehabilitation training, services or devices;
      • Supplementary education assistance;
      • Entertainment, hobbies;
      • Transportation;
      • Personal property and services.

In-Kind Support and In-Kind Maintenance

In-kind support and maintenance means that someone else, including a trustee, is helping an individual with his or her food and shelter expenses. Receiving In-kind support and maintenance that contributes to some or all of an individual’s food and shelter expenses could penalize the recipient or prevent him or her from receiving governmental support. This applies if the support is given in the form of gifts or payment of money or items that an individual could sell to pay for food or shelter. For Social Security Disability purposes, food and shelter includes the following expenses:

      • Room and board;
      • Rent;
      • Garbage collection and sewer;
      • Water;
      • Electricity, gas and heating fuel.

If a trustee provides in-kind support and maintenance to the beneficiary for the above services, the SSI benefits will be reduced up to a certain point. The amount by which the Social Security Administration will reduce a beneficiary’s payments is determined using certain models. It’s important to know how much SSI a beneficiary is receiving and what payments would need to be made from a trust that could be considered in-kind support and maintenance. A cost-benefit analysis would be necessary to determine if it is worth a trustee making in-kind support and maintenance payments that will cause a reduction in SSI benefits.

Special needs trusts or supplemental needs trusts are complex and there are serious implications for incorrectly paying certain expenses with them. Consult with your attorney about these issues if you want to set up a trust — or you are the beneficiary of one.

PERKINS & ZAYED, P.C.
1745 South Naperville Road, Suite 100
Wheaton, IL 60189
Phone: 630-665-2300 | Toll Free: 877-TRUST-50
Fax: 630-665-4343
Email: admin@trust-lawgroup.com
The information contained on this website is for informational and educational purposes only and is not legal, tax or financial advice. Always consult a qualified licensed attorney and/or appropriate professional to provide advice for your individual needs and circumstances. Use of this website does not create or constitute an attorney-client relationship. This website may include advertising material for Perkins & Zayed, P.C., The Estate and Trust Law Group. 

How to Set Up a Special Needs Trust

Estate Planning Advice
for Every Stage of Life.

How to Set Up a Special Needs Trust

Medical advances, an aging population, a changing political scene and the increase of conditions such as autism are combining to produce a growing need for a particular type of estate planning tool — the special needs trust.

Many people depend on government benefits, such as Social Security, Medicaid, rehabilitative care and transportation assistance, which are available for children and adults with special needs. However, these benefits can be slashed if an individual’s assets exceed a certain level. This can be an amount that is so low that the disabled person cannot live a comfortable existence without additional assistance. If loved ones give the individual too much money, or provide assistance in a way that breaks the rules, the person could lose benefits. This is a trap many families fall into because they view financial planning as too time-consuming and taxing — considering they’re already stressed taking care of loved ones with special needs. For example, an aging couple whose adult son has severe autism might want a special needs trust because they are worried about how the child will survive after the parents’ deaths. Or a group of siblings may want to set up a special needs trust for their young sister, who is a teenager, but expected to need supervision for the rest of her life.

A special needs trust allows parents (and others who care about someone with a disability) to comply with government regulations, yet invest and save money to meet a disabled individual’s financial needs.

In most cases, a special needs trust is a “stand alone” document, but it can be part of a Will. Assets in a special needs trust aren’t considered countable assets for purposes of qualification for certain governmental benefits based on need. (Disqualification from government benefits could occur if an individual’s assets hit just $2,000 and their annual income reaches $10,000.) Parents and others can also bequeath assets to the trust, rather than directly to the individual.

Funds in a special needs trust provide for supplemental care beyond what the government provides, including expenses such as utilities, medical care, special equipment, education, job training and entertainment. A special needs trust does not belong to the person with a disability, but is established and administered by someone else. The person with the disability is simply nominated as a beneficiary and is usually the only one who receives the benefits. The trustee is given discretion to determine when and how much the person should receive.

Many factors must be taken into consideration including assets and debts; estimated spending; life expectancies of the parents and children; and costs of care. In estimating the necessary size of a trust, one popular method is to estimate an individual’s yearly budget and divide by the Consumer Price Index. Planners then determine additional funds that are needed by taking into account the current medical diagnosis and other factors.

The trust must be carefully worded and show clearly that it:

      • Is established by the family (persons other than the individual with the disability).
      • Is managed by a trustee (and successor trustees other than the person with the disability).
      • Gives the trustee the absolute discretion to provide the assistance required.
      • Never gives the person with the disability more income or resources than permitted by the government.

The trust wording should also define what is meant by “special needs.” It should spell terms related to the unique needs of the disabled person; provide instructions for the individual’s final arrangements; determine who should receive the remainder of the trust after the person dies; provide choices for successor trustees; and protect the trust against creditors or government agencies.

Overall responsibilities of trusteeship include:

      • Understanding the beneficiary’s situation and needs, doing inventory of trust assets, maintaining records for income and principal transactions, and preparing periodic accounting.
      • Filing federal and state fiduciary income tax returns, obtaining IRS tax registration for the trust, and establishing accounts for the management of trust assets.
      • Monitoring disbursements, hiring and regularly monitoring agents and service providers, communicating with the beneficiary and service providers, and assisting in emergency situations to preserve the beneficiary’s lifestyle.

Other Issues to Consider:

When planning, take into account the parents’ ages. For example, parents in their thirties with an special-needs newborn, may turn to a special needs trust, while older parents and guardians may instead use life insurance, such as second-to-die policies.

A letter of intent should be prepared detailing the special needs of the individual including the past and present situation, relevant information about hospitalizations, medical history and medication. Include all pertinent information needed to enable future care to be effective.

Parents should pick a back-up guardian in their Wills. Other positions to fill may include limited guardianship and powers of attorney.

Consider making two family members joint trustees — rather than naming one sibling. Have trustees meet periodically to alter plans as available assets, benefits, and other needs change. Professional trustees, such as accountants, attorneys or investment advisors, may be the best answer.

Consult with your estate planning attorney about a special needs trust. Knowledgeable advisors are vital in making sure a trust complies with all regulations. Your attorney can also facilitate communication among family members in emotionally-charged situations.

PERKINS & ZAYED, P.C.
1745 South Naperville Road, Suite 100
Wheaton, IL 60189
Phone: 630-665-2300 | Toll Free: 877-TRUST-50
Fax: 630-665-4343
Email: admin@trust-lawgroup.com
The information contained on this website is for informational and educational purposes only and is not legal, tax or financial advice. Always consult a qualified licensed attorney and/or appropriate professional to provide advice for your individual needs and circumstances. Use of this website does not create or constitute an attorney-client relationship. This website may include advertising material for Perkins & Zayed, P.C., The Estate and Trust Law Group. 

What You Should Know About Special Needs Trusts

Estate Planning Advice
for Every Stage of Life.

What You Should Know About Special Needs Trusts

Bequeathing assets to a loved one with special needs is a benevolent gesture, but in some cases, it can cause problems that were never intended.

An inheritance can disqualify the disabled person from government needs-based aid programs including:

Supplemental Security Income (SSI), a Social Security Administration program that pays extra cash to people with limited assets and income.

Medicaid, which provides far-ranging medical assistance including doctors’ visits, home health care services and nursing homes.

Some assistance plans for the disabled require enrollment in SSI, Medicaid or similar programs. Losing those benefits can mean the loss of other essential help.

But there’s a solution to the dilemma: Create a “special needs” or “supplemental needs” trust. This can protect the benefits and provide other amenities for a child or adult with a disability who receives an inheritance or proceeds from a personal injury settlement or suit.

A special needs trust can supplement government benefits by providing, among other needs, amenities such as:

– Entertainment;

– Electronic equipment;

– Trips and vacations;

– Computer equipment;

– Athletic training;

– Companion services;

– Home health aides; and

– Transportation, including the purchase of a vehicle

The trust can hold cash, stocks, investments, and personal and real property. It can own life insurance and be used to hold money from personal injury settlements or judgments.

One way to establish a special needs trust is to set up a charitable remainder unitrust (CRUT), which can provide a lifetime income to the beneficiary, and eventually distribute the remaining assets to a charity or charities chosen by the trust creator.

A CRUT also offers upfront income tax deductions, estate tax advantages, and deferral of capital gains if appreciated assets are contributed.

IRS Revenue Ruling 2002-20 allows a special needs trust to be the beneficiary of a CRUT if it meets four criteria:

      1. The trust is solely devoted to caring for a beneficiary with special needs.
      2. The beneficiary has a physical or mental impairment a doctor can describe.
      3. The condition is expected to last for at least a year.
      4. No one else manages the individual’s financial affairs.

Typically, the CRUT makes payouts to the special needs trust at a fixed percentage of the assets, with a 5 percent annual minimum. The trustee then makes distributions for the benefit of the beneficiary with special needs.

Done with care, these distributions can provide a desirable lifestyle without jeopardizing government benefits.

Caution: Trusts are governed by state laws and should be drafted by an attorney who specializes in this area. In addition to professional fees, there may be costs associated with transferring assets to the trust and administering the trust.

How it Can Work

Suppose you have a permanently disabled 10-year-old child who is receiving SSI and Medicaid benefits because the family has limited assets and income and cannot afford the child’s monthly medications and therapy.

A relative wants to leave the child a $150,000 inheritance. Without planning, the child’s government benefits will be stopped and the inheritance must be used to pay the medical expenses for the next five years. After that time, the benefits will resume, but the inheritance will be gone. A special needs trust could preserve the inheritance for the child’s benefit.

PERKINS & ZAYED, P.C.
1745 South Naperville Road, Suite 100
Wheaton, IL 60189
Phone: 630-665-2300 | Toll Free: 877-TRUST-50
Fax: 630-665-4343
Email: admin@trust-lawgroup.com
The information contained on this website is for informational and educational purposes only and is not legal, tax or financial advice. Always consult a qualified licensed attorney and/or appropriate professional to provide advice for your individual needs and circumstances. Use of this website does not create or constitute an attorney-client relationship. This website may include advertising material for Perkins & Zayed, P.C., The Estate and Trust Law Group.