How Special Needs Trusts Work
A special needs trust provides financial support for your loved one without jeopardizing government benefits.
What is a Trust?
A trust is a legal arrangement in which one party (individual, group, or organization) holds and manages property for the benefit of another. The person (or persons) who benefits from the property, the beneficiary, does not own or control it. The person (or persons) or organization that manages and distributes the property, the trustee, does not benefit from it, other than reasonable compensation for services. A trustee is obligated by law to manage the property prudently, obey the instructions of the person who created the trust (called the settlor or grantor), and provide reports and accounting’s on a regular basis.
How a Special Needs Trust Can Help
If you want to leave money or property to a loved one with a disability, you must plan carefully. Otherwise, you could jeopardize your loved one’s ability to receive Supplemental Security Income (SSI) and Medicaid benefits. By setting up a “special needs trust” in your will, you can avoid some of these problems.
Owning a house, a car, furnishings, and normal personal effects does not affect eligibility for SSI or Medicaid. But other assets, including cash in the bank, will disqualify your loved one from benefits. For example, if you leave your loved one $10,000 in cash, that gift would disqualify your loved one from receiving SSI or Medicaid.
A way around losing eligibility for SSI or Medicaid is to create what’s called a special needs or supplemental needs trust. Then, instead of leaving property directly to your loved one, you leave it to the special needs trust.
You also choose someone to serve as trustee, who will have complete discretion over the trust property and will be in charge of spending money on your loved one’s behalf. Because your loved one will have no control over the money, SSI and Medicaid administrators will ignore the trust property for program eligibility purposes. The trust ends when it is no longer needed — commonly, at the beneficiary’s death or when the trust funds have all been spent.
How Trust Funds Can Be Spent
The trustee cannot give money directly to your loved one — that could interfere with eligibility for SSI and Medicaid. But the trustee can spend trust assets to buy a wide variety of goods and services for your loved one. Special needs trust funds are commonly used to pay for personal care attendants, vacations, home furnishings, out-of-pocket medical and dental expenses, education, recreation, vehicles, and physical rehabilitation.
PA ABLE Savings Program for Disability-Related Expenses
A PA ABLE account give individuals with qualified disabilities (Eligible individuals), and their families and friends, a tax-free way to save for disability-related expenses, while maintaining government benefits. Federal and state law authorized the creation of PA ABLE accounts.
The ABLE account can have contributions up to $14,000 each year. Friends and family can contribute to the account. The total per year applies to total contributions for the entire year. The account will be at it maximum at $511,758. Once it reaches that amount, no additional contributions can be made until funds are decreased. Only contributions to a PA ABLE account qualify for state income tax deductions.
If you can’t come up with a good candidate to serve as a trustee or are leaving a relatively modest sum and don’t want to set up a separate special needs trust, consider a “pooled trust.” These are special needs trusts run by nonprofit organizations that pool and invest funds from many families. Each trust beneficiary has a separate account, and the trustee chosen by the nonprofit spends money on behalf of each beneficiary. Pooled trusts (also called community trusts) are available in many areas of the country.
Will You Need a Lawyer?
Some lawyers will tell you that only an attorney can draft a special needs trust. But you can create a special needs trust yourself, with the right guidance.
Of course, there are times when you should seek an attorney’s advice. For example, you must see a lawyer if you want to create a trust that will be funded with the beneficiary’s own money (for example, a settlement from a personal injury lawsuit), rather than your money. Complicated and state-specific rules apply to these kinds of trusts.