If you have a child, grandchild, or other loved one with a physical or mental disability, you may be wondering what will happen to them after you’re gone. While it’s not advisable to leave money to a special needs individual outright, we can help you provide an inheritance that won’t jeopardize their eligibility for government benefits.
Why Leaving a Direct Inheritance Isn’t a Good Idea
There are strict income and asset requirements for Supplemental Security Income (SSI), Medicaid, and other programs for disabled children and adults. Although recipients aren’t penalized for owning a home, car, and personal effects, even a modest cash inheritance can leave them ineligible for assistance. This is especially problematic for disabled individuals who require expensive medications and therapies to manage their condition.
Even if your loved one isn’t currently reliant on government benefits, your planning should take the eligibility requirements into consideration. You don’t know what the future will hold, and many disabling conditions create additional challenges as a person ages.
How a Third-Party Special Needs Trust Can Help
A special needs trust maintains eligibility for government benefits by acting as the legal owner of cash, stocks, real estate, and other assets. A first-party special needs trust is funded by the person with special needs, while a third-party special needs trust is funded by someone who wishes to provide financial security for the special needs beneficiary.
Third-party special needs trusts are often created as part of a person’s general estate planning efforts. They can be included in a Last Will and Testament, created within a living trust designed to avoid probate, or drafted as a stand-alone trust. There is no limit to the number of trusts that can be created to benefit the same special needs individual, but it is possible to have multiple family members add assets to the same trust.
In a third-party special needs trust, a trustee manages the funds and makes the appropriate distributions to the special needs beneficiary. Typically, the grantor (creator) of a special needs trust names themselves as the trustee and a family member, friend, or third-party as the successor trustee. Co-trustees can also be named if desired. However, even if a person with special needs has the mental capacity to manage their own funds, they are not legally allowed to be named as both the trustee and the beneficiary.
The terms of the trust dictate how funds in the trust can be spent. Trusts are generally not used for food and shelter because this can present problems maintaining eligibility for government benefits. However, they can be used for a wide range of expenses that enhance the beneficiary’s quality of life. For example:
- Therapy services not covered by Medicaid
- Assistive equipment not covered by Medicaid
- Tutoring or supplementary educational services
- Vacations
- Concerts, sporting events, and special experiences
- Supplies for hobbies or special interests
- Support to start a small businesses
- Cell phone or internet services
- Transportation expenses
- Expenses related to the care of a pet
- Personal items such as clothing, a new computer, or furniture
- Insurance
- Companionship expenses
Once created, the trust will continue to operate until the funds are depleted, the beneficiary no longer needs government benefits, or the beneficiary passes away. If there are funds remaining in the trust when the special needs beneficiary passes away, they will be distributed to the individual or organization named as the residual beneficiary. While assets remaining in a first-party special needs trust are required to be used to repay Medicaid, a third-party special needs trust has no legal obligation to repay the government for services the beneficiary received during their lifetime.
Let Us Help You Plan for Your Loved One’s Future
People with special needs deserve a chance to reach their full potential. A special needs trust gives your loved one access to the resources they’ll need to enjoy a high standard of living regardless of what the future may hold. Contact us today to schedule a free strategy session to discuss your options for funding a trust. Consultations are available at our Howell or Clinton Township offices or anywhere in Michigan virtually.