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Why should you create a special needs trust?

On Behalf of | Jan 14, 2022 | Estate Planning |

When you are working on your estate plan, one thing you may want to create is a supplemental needs trust.  A supplemental needs trust is a legal document that creates a trust fund for one of your beneficiaries, who has a chronic illness or disability that requires them to rely on government benefits and assistance.

The nice thing about a supplemental needs trust is that it helps your beneficiary protect their eligibility for government benefits.  Since many kinds of benefits, especially Medicaid and Supplemental Security Income, are based on your beneficiary’s income and personal holdings, it makes sense to place any money and assets you want to pass on to them into a supplemental needs trust.  The assets in your beneficiary’s supplemental needs trust will be used to supplement your beneficiary’s government benefits and assistance.  Another key aspect of a supplemental needs trust is that any assets contained in the trust at the time of the beneficiary’s death are not subject to a state lien to recapture the value of governmental benefits and assistance paid to the beneficiary.

Why use a supplemental needs trust to pass on assets?

When you use a supplemental needs trust, any money or assets you place into the trust isn’t be put directly into your beneficiary’s name.  As a result, the assets you place into the supplemental needs trust are excluded from your beneficiary’s income and estate and will not disqualify your beneficiary from continuing to receive government benefits and assistance.  The assets you place into the supplemental needs trust, however, can be used to benefit your beneficiary by supplementing their government benefits and assistance.

When and why to use a special needs trust?

While a supplemental needs trust is funded with third-party money and assets, such as an inheritance from a non-spouse, a special needs trust is funded with the money and assets of the individual with special needs.  Frequently, a special needs trust is created and funded with workers compensation, insurance and/or settlement proceeds from an accident that resulted in the individual having special needs.  Other times, a special needs trust is created and funded after an individual with special needs receives a divorce settlement or inherits money and/or assets because the person either died intestate (without an estate plan) or with a substandard estate plan.  In these and similar circumstances, the received funds are placed into a special needs trust in order to ensure the person with special needs qualifies for and continues to qualify for federal and/or state government benefits and assistance.  A downside to a special needs trust is that any assets contained in the trust at the time of the beneficiary’s death are subject to a state lien to recapture the value of governmental benefits and assistance paid to the beneficiary.

You can create a pooled or individual special needs trust.  In either case, your loved one will be able to benefit from the extra money or assets without putting their benefits at risk.

Plan for a supplemental or special needs trust to protect your beneficiary

Those with special needs don’t need to go without just because they need to qualify for state or federal benefits.  It’s possible to provide them with additional financial security by creating a supplemental or special needs trust.

You can set up a supplemental needs trust whenever you’d like.  You can design it to start paying out to supplement their state or federal benefits if you pass away or when your beneficiary reaches a certain age.  Doing this will help you be sure that they’ll be cared for, even if you can’t be there to support them any longer.