When you have a family member with a disability, ensuring their long-term financial security is a top priority. However, providing for their needs can be complicated, especially when it comes to preserving their eligibility for government benefits like Medicaid and Supplemental Security Income (SSI). This is where a special needs trust comes in.
A special needs trust, also known as a supplemental needs trust, allows you to set aside funds for your loved one's care without jeopardizing their access to essential government assistance. At the Estate Planning & Elder Care Firm of Michigan, our experienced Howell MI estate attorneys understand disability planning. We can guide you through the process of establishing a special needs trust tailored to your family's unique circumstances.
Types of Special Needs Trusts in Michigan
Understanding how the various types of special needs trusts differ from one another is crucial for selecting the right option for a vulnerable loved one.
First-Party Special Needs Trusts
First-party special needs trusts, also known as self-settled trusts, are funded with assets that belong to the person with a disability. These assets may come from a personal injury settlement, an inheritance, or other sources. To be eligible for a first-party trust, the beneficiary must be under 65 years old and meet the Social Security Administration's definition of disabled.
Family members can establish a first-party special needs trust. Under the Special Needs Trust Fairness Act, disabled individuals who are mentally competent can also establish this type of trust.
The Medicaid payback provision is a key characteristic of first-party trust. When the beneficiary passes away, any remaining funds in the trust must first be used to reimburse the state for Medicaid benefits received. Only after this requirement is met can any leftover assets be distributed to other beneficiaries.
Third-Party Special Needs Trusts
Third-party special needs trusts are funded by assets belonging to someone other than the person with a disability, such as a parent, grandparent, or sibling. Because this type of trust is not subject to the Medicaid payback provision, it offers more flexibility and control over the distribution of assets than a first-party special needs trust.
With a third-party trust, the grantor (the person creating the trust) can specify how the funds should be used and can even designate a remainder beneficiary to inherit any assets left in the trust after the primary beneficiary's death.
Pooled Trusts
In addition to first-party and third-party trusts, Michigan also offers pooled trusts. Non-profit organizations manage these trusts and allow multiple beneficiaries to pool their resources for investment purposes while still maintaining separate accounts for each individual.
Pooled trusts can be a good option for families with limited assets or those who prefer to have a professional trustee manage the funds. Like first-party trusts, pooled trusts are subject to the Medicaid payback provision.
How Special Needs Trusts Protect Assets and Benefits
The primary purpose of a special needs trust is to provide supplemental care and support for a person with a disability without affecting their eligibility for means-tested government benefits such as Medicaid and SSI, which have strict income and asset limits.
Even a small inheritance or settlement can disqualify a beneficiary from receiving assistance. By placing funds in a special needs trust, you can ensure your loved one's needs are met while preserving their access to critical benefits.
Special needs trusts can be used to pay for a wide range of expenses, including:
- Medical care and equipment not covered by insurance
- Therapy and rehabilitation services
- Educational and vocational training
- Housing and home modifications
- Transportation and vehicle modifications
- Travel and recreational activities
- Purchase of a car, furniture, and other personal property
It's important to note that special needs trusts should not be used to pay for basic needs like food and housing, as these expenses are meant to be covered by SSI and other benefits. However, with proper planning and management, a special needs trust can significantly enhance your loved one's quality of life without compromising their eligibility for assistance.
When to Establish a Special Needs Trust in Michigan
Ideally, a special needs trust should be established as early as possible to ensure your loved one's future is secure. However, there are several specific situations in which creating a trust becomes particularly important:
- When a Child with a Disability Reaches Adulthood. As a child with a disability approaches age 18, it's essential to have a plan in place for their continued care and support. Establishing a trust before they reach adulthood can help ensure a smooth transition and protect their assets and benefits.
- When an Inheritance or Settlement is Expected. If your loved one with a disability is expected to receive an inheritance or settlement, it's crucial to have a special needs trust in place beforehand. This will prevent the sudden influx of assets from disqualifying them from means-tested government benefits.
- When Parents or Caregivers are Estate Planning. As parents or caregivers of a person with a disability, it's never too early to start planning for the future. Incorporating a special needs trust into your overall estate plan, such as a will or trust, can provide peace of mind, knowing that your family member will be cared for even after you're gone.
Creating a special needs trust requires careful consideration and professional guidance. The knowledgeable Howell estate attorneys at the Estate Planning & Elder Care Firm of Michigan have extensive experience in disability planning and can help you with the legal and financial aspects of establishing a trust.
We understand that every family's situation is unique and take a personalized approach to each case. Our team will work closely with you to understand your loved one's needs, assess your options, and develop a comprehensive plan to safeguard their future.
