Parents of children with special needs often face an overwhelming fear about what will happen to their child after their passing. Gifting them their inheritance or naming them a beneficiary on your life insurance policy could kick them off public assistance benefits like Medicaid and SSI.
Could your child benefit from a special needs trust instead of a one-time inheritance?
Special needs trusts are a powerful way to give your child some financial security and provide some income without kicking them off the benefits that pay for their medical care. Here is what you should know about these trusts and what you can do to set one up successfully.
What is a Special Needs Trust?
When it comes down to your estate planning for a child with disabilities, you need to ensure that every penny counts. A special needs trust is one way to provide for their future without sacrificing their potential benefits from Medicaid and Social Security Income.
But what is a special needs trust, and what makes it the ideal vehicle for your beneficiaries?
A special needs trust is simply a way for you to provide for financial needs that are unlikely to be handled via public assistance. For example, all assets contained within the trust could be used for medical expenses, caretakers, and other necessities. It will be handled not by your child but by a third-party trustee who oversees the funds.
There are two major types of special needs trusts that could be used: a third-party trust or a first-party trust. A third-party special needs trust (also referred to as a supplemental needs trust) is funded by someone other than the beneficiary. A parent could fund it for a child or a grandparent for a grandchild.
A first-party trust allows a person with disabilities to place their own assets and finances into a trust, rendering them eligible for benefits under Social Security Income and Medicaid.
What Can a Special Needs Trust Pay For?
A special needs trust is designed to help someone with disabilities cover expenses outside of what public benefits offer. The trust can be used to cover a multitude of resources that could improve their standard of living, including:
Medical bills not covered by Medicaid and Medicare, such as dental visits or specialty services
Service animals
Assistive technology expenses
Computers, phones, and personal communication
Recreational activities like vacations
Car insurance
It is equally important to note that funds from a special needs trust cannot be used for expenses outside of these bounds. It cannot be used for food or housing, to name two large categories that are excluded from special needs trust funds. You can, however, pay for caretakers and any out-of-pocket expenses for medical care they face.
What are the Pros of a Special Needs Trust?
A special needs trust may be the perfect opportunity for you to provide financial assistance for a child or family member. It is mutually beneficial to both parties: the grantor contributing to the trust knows that their assets are going exactly where they want, and the beneficiary receives some financial support when they find themselves in a difficult situation.
The best part of a special needs trust is that it does not negate public assistance. These programs often include income restrictions, but a trust is not counted as part of their income. Rather, it is a separate entity that does not interfere with SSI or Medicaid.
This is why legal documents should be drawn up with the help of a professional to make sure that the bounds of the special needs trust are specific and clear, and comport with the rules surrounding government benefits.
What are the Cons of a Special Needs Trust?
Of course, there are some inherent drawbacks to a special needs trust that should be noted. The beneficiary receives limited control over the contents of the trust, which could hinder them from accessing funds they desperately need for something outside of the purview of the trust.
In addition, you will have the added expense not only of drawing up the documents but of paying the trustee as well. This can be quite expensive in the near term and can eat into the proceeds of the estate over time. However, there is no way around establishing a trustee to monitor ongoing payments from the trust as specified in the original documentation.
One major consideration when establishing a special needs trust is the age of the beneficiary. A trust cannot be established for someone who is over the age of 65.
First-party special needs trusts may also require a payback to Medicaid for medical expenses upon the beneficiary’s death. On the other hand, a third-party trust can give what remains to the remainder beneficiaries.
Create Your Special Needs Trust with Professionals at Magellan
There is a lot on the line when you want to draw up a special needs trust to benefit your loved one or child after your passing. Pay careful attention to the guidelines to ensure that they get the maximum benefit. Magellan is here to help you draw up documentation and act as a trustee for the long haul. We offer comprehensive estate, legal, tax, and financial planning for your future.
Reach out to us today to learn more about whether a special needs trust is right for your family!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.