Special Needs Trusts

Special Needs Trust – The Basics

A Special Needs Trust is a very specific kind of trust that offers the option of keeping someone physically or mentally disabled or chronically ill, eligible for public benefit programs while also receiving the benefit of a supplemental fund.

We will answer the following questions about Special Needs Trusts below:

• Who needs a Special Needs Trust (SNT)?
• What is a Special Needs Trust?
• Who can establish a Self-Settled SNT?
• How much money can you put in an SNT?
• When should you set up an SNT?
• Who can manage an SNT?
• What can funds in an SNT be used for? 
• Does an SNT affect Supplemental Security Income (SSI)?
• Can money in an SNT be invested?
• Do SNTs pay taxes? 
• Who Pays Taxes on an SNT?
• Should an SNT be revocable or Irrevocable?
• What happens to the money in an SNT upon death?

Who Needs a Special Needs Trust?

If you have a loved one with special needs, it may be beneficial to set up a Special Needs Trust to help support that person financially after you die. A Special Needs Trust is a very specific kind of trust that offers the option of keeping someone eligible for public benefit programs while also receiving the benefit of a supplemental fund.

For families caring for a loved one with a disability, Special Needs Trusts can provide peace of mind. These trusts can be established with funds that belong to the person who is receiving public benefit programs or with funds that belong to someone else such as one or more family members.

Common challenges you may face are:

• Issues of guardianship
• Potential loss of control to the courts
• Endless challenges of reporting
• Trying to maximize the quality of life
• Provide a happy and stress-free life
• Maintain the current medical and income benefits

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What Is a Special Needs Trust?

The estate planning device that allows an individual to continue to receive governmental assistance when they either inherit assets or when they receive assets through litigation, is a Special Needs Trust.

This type of trust allows you to improve the quality of life for your loved one, without jeopardizing their eligibility to receive government benefits, like Medicaid or Supplemental Security Income.

A Special Needs Trust can also be an essential part of your estate plan to make sure your disabled loved one continues getting the care they need after you are gone.

When money is left outright, the disabled individual could place those assets in a self-funded Special Needs Trust (SF-SNT); however, failure to plan properly unnecessarily subjects those funds to the Medicaid payback that must be included in a SF-SNT.

When AFEPI creates your Special Needs Trust, it will successfully help you to exclude your special needs person’s inherited assets from the scrutiny of Medicaid and/or other government entities. Meaning they can not come after those assets OR stop their benefits.

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Who Can Establish a Self-Settled Special Needs Trust?

A “self-funded” Special Needs Trust (SF-SNT) must be created by a parent, grandparent, legal guardian or court to receive and hold assets (such as inheritance, lawsuit settlement, gifts) that belonged to the person with the disability, who is the beneficiary of the trust.

How Much Money Can You Put In a Special Needs Trust?

The child cannot accumulate or receive more than $2,000 in assets or risk losing important and life-sustaining public assistance benefits. For that reason, a Special Needs Trust must to be set up carefully and by AFEPI’s experienced special needs attorney. There is no limit on how much you may place in the SNT.

I know I need to make a plan. I’m ready.

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When Should You Set Up a Special Needs Trust?

The sooner the better. A special needs trust provides financial support for your loved one without jeopardizing government benefits. If you have a loved one with special needs, you might consider setting up a special needs trust now to help support that person financially after you die.

If your loved one is to inherit from a Grandparent or a sibling, they need to ensure their assets are properly designated. We can help you do this.

Many times a Special Needs Trust is created when:

• the special needs person is receiving benefits
• the parents/grandparents want to preserve their contributions
• the parents/grandparents do not want their inheritance/gift to disqualify the person
• the disabled party owns property prior to the onset of the disability
• the disabled party has an income and savings prior to the onset of the disability, prior to receiving an inheritance or prior to receiving a court-mandated settlement

The decision to make the trust should be made prior to the onset of the disability or as soon as you have the ability to do so. In other words – TODAY.

Who can manage a Special Needs Trust?

A trustee can be the child’s parent or other relative, a trusted friend, or a professional such as a lawyer, accountant, trust company, bank or private professional fiduciary. As with any trust, reliability is crucial in determining who can and will manage the trust’s terms. The law imposes a duty on trustees to faithfully and honestly carry out the trust’s terms, but for the most part there is no court supervision.

What can the funds in a Special Needs Trust be used for?

Special needs trusts can pay for home and vehicle maintenance along with a variety of other items:
• a vacation
• a computer
• electronic equipment
• educational expenses
• ongoing monthly bills such as phone, cable, and internet services.

Does a Special Needs Trust affect SSI?

Funds held in a properly drafted special needs trust will not affect a supplemental security income (SSI) or Medicaid recipient’s benefits. But problems can develop when funds come out of a special needs trust. Your AFEPI team will help you understand the entire process. We are available to answer questions before, during and after we create this special trust.

I know I need to make a plan. I’m ready.

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Can Money In a Special Needs Trust Be Invested?

Trustees of Special Needs Trusts have a duty to properly manage the funds in their care. However, most trustees, especially non-professional ones, are not sophisticated investors and they should not be directly managing the investment of large sums of money. AFEPI can provide assistance and advice as well. 

Do Special Needs Trusts Pay Taxes?

Most Special Needs Trusts are third party trusts, and they are taxed as a pass-through entity. So the trust does not pay taxes on any income that it earns as long as that income is passed on to the beneficiary. If there is any undistributed income, the trust will pay taxes on that.

Who pays taxes on Special Needs Trust?

Generally, for income tax purposes, the FP SNT will be taxed as a grantor trust with respect to the beneficiary during his or her lifetime. This means that all income, deductions, and/or credits with respect to the assets of the FP SNT will be reported on the beneficiary’s individual tax return.


Should a Special Needs Trust Be Revocable or Irrevocable?

All first-party SNTs must be irrevocable. A third-party SNT can be either irrevocable or revocable. Revocable — A revocable trust is a trust in which the grantor can revoke or change the trust terms at any time. Only third-party SNTs can be revocable.

What Happens To the Money In a Special Needs Trust at Death?

At the beneficiary’s death, in most cases the SNT will be terminated. The trustee is responsible for dissolving the trust and fulfilling the instructions laid out in the trust document. In addition, depending on the type of trust, the SNT may owe money to the state if the person with special needs received Medicaid benefits during her lifetime.

In conclusion, the most important advice we can give is not to wait. Don’t wait until the benefits of your loved one are denied or retracted (if they are already receiving benefits).

Once a special needs person becomes the owner of an asset, it is too late to change. If a will-maker passes away and grants ownership to a special needs person, it’s too late to protect it with a Special Needs Trust, putting all benefits in jeopardy. A conversation today will help you determine the immediate steps you need to take to protect your loved one. Your AFEPI professionals will provide answers to your questions and a clear path to asset protection with a Special Needs Trust.

I know I need to make a plan. I’m ready.

Schedule My Free Consultation!