Special Needs Trusts

The purpose of any special needs trust is to maximize resources for an individual with disabilities. Many individuals with disabilities rely on means-tested (or needs-based) public benefits that have income and/or asset limits. The two most common types are Supplemental Security Income (SSI) and Medicaid. It would be prohibitively expensive for many individuals to replace these public benefits and services by privately purchasing them. And this same network of support is sometimes simply unavailable except through these public benefit programs. If an individual who has means-tested public benefits later receives and retains income and/or assets in excess of the eligibility limits for a particular public benefits programs, he or she will forfeit eligibility for these important benefits.

A special needs trust is designed to receive and administer assets for the benefit of the individual with a disability. If the trust is drafted, established, and administered correctly, the transfer of assets into the trust and the existence of the trust assets will not disqualify the trust beneficiary from means-tested public benefits. The beneficiary continues to receive the public benefit and, at the discretion of the trustee, has access to the trust assets that improve the quality of the beneficiary’s life.

A common phrase used to describe special needs trusts is that they “supplement, not supplant” public benefits. As a result, special needs trusts are sometimes referred to as supplemental needs trusts. For the purpose of this article (and among elder law attorneys, in general), the terms are interchangeable. The terms can refer to either first party trusts, which hold assets that belonged to the individual with disabilities or to which he or she was legally entitled, or third party trusts, which hold assets that belonged to someone other than the individual with disabilities. A special needs trust is never a pure support trust which directs and requires the trustee to distribute to the beneficiary as much income and principal as is necessary for the beneficiary’s health, education, maintenance, and support.

Is a Special Needs Trust Necessary and Appropriate? Are There Alternatives?

A special needs trust is not always necessary when an individual with a disability is to receive or has received assets that, if kept, would disqualify him or her for means-tested public benefits.

There may be other appropriate tools to protect those benefits or it may be appropriate to forego the benefits for a period of time. For instance: ABLE Act accounts are available for special needs planning. In December 2014, Congress passed the Achieving a Better Life Experience Act (ABLE Act). The ABLE Act allows states to set up programs that permit individuals with disabilities or their family members to make contributions to 529A accounts which are similar to 529 education accounts. But there are some limitations on these accounts: they are only available to individuals whose disability was established before age 46; there can be only one ABLE Act account for an individual; anyone can contribute to the account, including the individual, but total contributions in a year may not exceed $20,000 (in 2026) in a single year; funds can be used for “qualified disability expenses” and distributions for any other purpose will make the entire account countable as a resource; and upon the death of the account participant, the remaining account balance is subject to payback. However, an ABLE Act account may be a better choice in the case of a small inheritance (less than $100,000), other unplanned receipt of modest funds, or a situation where the individual saves money and does not spend down the public benefits to remain below the income limit. An ABLE Act account may also be a good option if the family would like the individual to have more autonomy over a portion of assets while the rest are managed in a traditional special needs trust.

In some cases, individuals receive a modest enough sum that they can spend down the excess resources. Common spend down opportunities include purchasing a home or home improvements and repairs; furniture; books and education, including tuition; entertainment, including vacations, stereo and television, and magazine and newspaper subscriptions; motor vehicles and motor vehicle repairs; funeral expenses through an irrevocable mortuary trust; legal fees; services of a care manager; and more.

CompleteMyEstatePlan.com always takes into account the possibility your heirs will need to preserve financial aid due to a disability or health condition.