If you have a special needs child, or other family member, you already know that the costs associated with caring for a special needs individual can be extraordinary. Fortunately, there are federal assistance programs that can help with those costs. As a parent, however, you likely wish to contribute to your child’s care as well. Doing so can be tricky while you are alive and even more complicated in your estate plan, because most assistance programs have an income and assets limit that cannot be exceeded or benefits will be affected. A special needs trust is often the solution. If you plan to create and fund the trust, you will need to create a third-party special needs trust.
Typically, a parent is able to leave assets directly to adult children by way of a gift in a Last Will and Testament. Gifting assets to a special needs adult, however, frequently creates more problems than it solves because of the asset limits used by federal assistance programs such as Medicaid and Supplemental Security Insurance, or SSI. If a program participant suddenly inherits assets from a well-meaning family member, those assets will likely cause the participant’s assets to exceed the program limit, causing the participant to lose eligibility for benefits. Creating a special needs trust resolves this dilemma.
Also referred to as a “supplemental needs trust, a special needs trust allows you to supplement your child’s lifestyle without jeopardizing eligibility for federal assistance programs. If you plan to use your own assets the trust is a third-party trust. Conversely, if your special needs child were to receive funds in his/her name, such as funds received as a settlement or award from a personal injury accident, the trust created would be a first-party trust because it is funded by assets owned by the beneficiary of the trust.
A third party special needs trust must be created using very precise language for it to avoid jeopardizing eligibility for federal benefit programs. Furthermore, the funds held by the trust can only be used for very specific things, such as classes, personal services, transportation, and vacations. Because of the special rules that apply to this type of trust it is imperative that you choose the right trustee and that you consult with your estate planning attorney when you are ready to create one.