A special needs trust, or SNT, is an important part of planning for the financial security and lifestyle of a family member with special needs. An SNT can allow the trust’s beneficiary to receive financial support from the family for supplemental needs without losing public benefits, such as SSI (Supplemental Security Income) and Medicaid. A recent article from The Westerly Sun, “Special needs trust could ease families’ stress,” explains how this works.
A parent typically has the special needs trust created. As the grantor, the parent establishes the trust and names a trustee who will be responsible for managing the trust. The trust may be funded with gifts throughout the parent’s lifetime or from other sources, such as a court settlement or an inheritance.
Life insurance proceeds are often used as the funding mechanism. The trust purchases a life insurance policy on the life of one or both parents of a special needs individual. Government benefits are protected as long as the trust is named the policy beneficiary.
The role of a trustee is important in a special needs trust. They must manage the funds within the trust and ensure that they are only used to supplement SSI and Medicaid, the two government programs that typically cover the costs of housing, food, and medical care. The SNT can be used for other qualified expenses, including transportation, travel, education, entertainment, professional services, and personal items.
The parent could serve as a trustee, or a trusted friend or relative may be named. Whoever is chosen as the trustee should be familiar with the family and the needs of the family member with disabilities. You also want to name a person who is competent at managing finances and can be trusted to stay current regarding SSI and Medicaid regulations.
Another option is to hire a professional trust company to manage the special needs trust. This type of company is experienced in both asset management and government regulations and would provide parents with strict recordkeeping of all financial transactions associated with the trust.
Parents should also be familiar with areas of concern about special needs trusts. The trustee controls how and when funds are distributed, which can frustrate beneficiaries if requests for funds are denied.
While third-party SNTs are funded by someone other than the beneficiary, the beneficiary’s own assets fund first-party special needs trusts. The trust must pay back Medicaid for money used for the beneficiary after the beneficiary’s death. This repayment could deplete the trust, depriving secondary beneficiaries of any funds they might otherwise receive. Third-party trusts do not require Medicaid repayment.
Speak with an experienced estate planning attorney before establishing a special needs trust to be sure that this is the right solution for your family’s situation.
Reference: The Westerly Sun (June 10, 2023) “Special needs trust could ease families’ stress”
