This is the first in a series of articles about various planning tools available to families with special needs loved ones. One of the most common tools, and the one most people seem familiar with, is a special needs trust. There are numerous types of special needs trusts; each suited to a specific situation. Yet generally all of these trusts have the same goal. To enhance the quality of life for an individual with special needs while maintaining important means tested government benefits.
A trust is basically a contract between three parties. First there is the “settlor” or “grantor”. This is the person that is setting up trust and probably contributing to it as well. In the context of a special needs trusts this is typically a parent, grandparent, or other loved one. The second party is the trustee. The trustee takes legal title of the trust property, but must follow the terms of the trust and manage its assets for the benefit of the beneficiary. The beneficiary is the person who “benefits” from the trust assets.
The key aspect of a special needs trust is the trust assets are “owned” by the trustee rather than the beneficiary. Therefore they are not countable for most government benefit purposes and the beneficiary remains eligible for programs such as SSI and Medicaid (though please read below for a word of caution). The trustee is bound by the terms of the trust and must use the assets for the beneficiary’s benefit.
The special needs trust is an important tool because it allows parents and grandparents to leave an inheritance that will benefit their loved one over time. In many circumstances this is preferable to a direct inheritance that may suspend benefits. In short the special needs trust provides a mechanism for taking care of a disabled loved one after the parent is no longer here.
An important word of caution. There are a number of rules and regulations for a special needs trustee to follow. One should only accept the responsibility of special needs trustee after careful discernment and consultation with an attorney. Simply taking money or assets out of trust and giving them to the beneficiary may result in a suspension of benefits and tax issues among other problems. Special needs trusts are wonderful tools. But like any tool one has to know how to use it. In many instances a bank or corporate trust department with specially trained fiduciaries is the appropriate party to serve as trustee. We’ll write more on this issue in a coming article.
Next week we’ll discuss the basic differences between a traditional special needs trust and a pooled special needs trust.