Special needs trusts are a useful way to support a special needs individual, especially a child. However, there are certain considerations to keep in mind as to when to create a special needs trust.
Individuals with disabilities can often use extra help. Whether it's from the government, family or friends, a little bit of assistance can go a long way. This is especially true with children. There are a variety of government programs and legal tools to help provide this lending hand. One such legal tool is the special needs trust. The purpose of this article to discuss special needs trusts and the different circumstances that might dictate when and how someone might want to set one up.
What is a special needs trust?
A special needs trust is a trust that exists to improve the quality of life of someone with any of the following:
- A learning disability
- Behavioral concerns
- Physical incapacity
- Emotional challenges
In many cases, anyone with a disability may be able to benefit from a special needs trust.
Almost anyone can create these unique trusts, although it's often parents who create them for their children. There are a variety of reasons why parents do this, but one of the biggest reasons is to provide for their child without interfering with their child's eligibility for government benefits.
Government benefits eligibility
Because many government social programs go to those who have financial need, eligibility for enrollment will often examine the person's assets.
|Federal Government Programs and Asset Eligibility Requirements|
|Name of Program||Uses an Asset Test?|
|TANF (Temporary Assistance for Needy Families)||Yes|
|SSI (Supplemental Security Income)||Yes|
|SNAP (Supplemental Security Income)||Yes|
As evidenced by the above chart, some of the most beneficial forms of government assistance will look at an applicant's assets to determine eligibility. This is especially notable for Medicaid and SSI, which many disabled and special needs individuals rely on to help live their daily lives.
Keeping these eligibility requirements in mind, there are several questions that many parents ask when deciding to create a special needs trust.
When should I create the special needs trust?
This question is typically asked with respect to the decision to make a special needs trust now or to have one created when the parents pass away. The answer to this question depends on the specific situation the parents or child finds themselves in. However, in most cases, it's usually better to create one now as opposed to creating one later.
Why is it sometimes best to create a special needs trust now?
There are several reasons why it's usually better to create the special needs trust now as opposed to waiting until the parents have died.
First, it gives more time for others to help fund the special needs trust. It can be cash gifts from friends and family or bequests from someone else's will. If someone dies or wants to make a gift before the parents die, there will be no special needs trust in place that's ready to accept the contribution.
Second, it can help the future special needs trustee know how to use the special needs trust. When parents create a special needs trust before they pass away, they can serve as trustees for that trust. This allows them to demonstrate how they feel the resources from the special needs trust should be used.
The parents can do this by creating a paper trail of payments made from the special needs trust. A future trustee will be able to refer back to these financial records and not only know how the money should be sent, but absent a change of circumstances, will even know who to send the money to.
Third, it allows parents the opportunity to oversee the special needs trust and make any changes while they're still around. This can also allow parents to make sure that their child will still be able to pass any necessary asset tests for government benefits, such as SSI or Medicaid.
Fourth, it may take time to identify the property to place into the special needs trust. There may also be a delay in processing the property into cash. For example, if parents want to use a vacation home to provide money to the special needs trust, it will take time to list the property for sale and complete the closing.
By setting up the special needs trust sooner rather than later, the parents can take care of the sale of the vacation home and place the funds into the special needs trust while there's plenty of time to do so. This will also allow the parents to time the housing market and provide them with the opportunity to sell the house for the highest possible price.
Why it's sometimes best to wait until the parents pass away to create the special needs trust
In some limited situations, it might be best for parents to create the special needs trust at their passing as opposed to while they're still alive. One such situation can be if the parents want to contribute to the special needs trust with an asset they still need, such as their home.
Alternatively, they may not have the financial ability to substantially fund the special needs trust until they pass away. For instance, they may want to fund the special needs trust with proceeds from their life insurance policy.
Funding a special needs trust with legal proceeds
Parents can fund a special needs trust from a variety of sources, including a settlement or judgment from a medical malpractice or personal injury lawsuit. In a number of situations, an accident or medical mistake is what leads to a child's disability and need for a special needs trust.
To avoid having the child lose his or her eligibility for government benefits such as SSI or Medicaid, it's a good idea to place the legal proceeds into a special needs trust. This is particularly true when the payout is a significant lump sum of money.
A special needs trust is a good idea even if the desire for public benefits is not important to the child or the payout is in the form of a modest structured settlement. That's because the special needs trust can still be a good way to ensure the responsible management of the funds received from the legal settlement or judgment.