“What is a special needs trust and when would I need one?”
A “special needs trust” or “supplemental needs trust” is a way to solve a problem facing many younger and older people who suffer from a disability. Here’s the problem:
- The disabled person is receiving, or will receive in the future, government benefits that are need based such as Alabama Medicaid and Supplemental Security Income (SSI)
- If the disabled person receives an inheritance or a gift, it will likely push them over the maximum amount of resources (assets) which normally is $2,000
- If the disabled person goes over the maximum amount of resources, then he or she will lose the governmental benefits.
But money put into a proper special needs trust will not count against the resource limit of $2,000 so that the government benefits are left intact.
Let’s use a typical example of Richard to illustrate this.
- Richard is a 21 year old man suffering from severe autism and Richard is not able to work
- Richard receives SSI as he does not qualify for SSDI (Social Security Disability Insurance) as he never worked
- Richard also receives Alabama Medicaid
- Richard requires constant care and will not be able to live on his own
- Richard’s parents and grandparents are dedicated to making sure Richard is taken care of even after they have passed away
So, what do Richard’s parents and grandparents do to make sure Richard is taken care of?
Let’s look at some of the options.
- Give money now to Richard in his own name in his own bank account
- Leave money to Richard’s sister Jane either in a will or through a trust so that Jane will have money to pay for Richard’s needs throughout Richard’s life
- Leave money directly to Richard through a will or through a trust
Let’s look at each of these options to see the advantages and disadvantages.
Give money now to Richard in his own name in his own bank account.
Advantage is this is simple and cheap.
Disadvantages include that:
- Richard is not capable of handling his own financial affairs;
- No one is looking out for Richard’s needs when his parents and grandparents are gone; and
- Richard will be kicked off of SSI and Medicaid if the amount given to him pushes him over the $2,000 limit.
This does not appear to be a good choice to accomplish the goal of caring for Richard.
Leave money to Richard’s sister Jane either in a will or through a trust so that Jane will have money to pay for Richard’s needs throughout Richard’s life.
- This is a cheap solution and
- Jane will have money to take care of Richard in the years to come after Richard’s parents and grandparents are gone.
Disadvantages include that:
- Jane is under no obligation to use the money for Richard;
- If Jane gets divorced then her ex spouse may get some or all of the money that was intended for Richard;
- If Jane files for bankruptcy, she will most likely lose this money or it will have already been spent; and
- If Jane dies, the money will pass to whoever she has designated in a will or a trust which may or may not be Richard.
Leave money directly to Richard through a will or through a trust.
- Simple and cheap
- Money goes to Richard
But the disadvantages are:
- Richard is not capable of managing his money;
- There is no plan for the money to last his lifetime to help Richard; and
- Richard will lose out on his SSI and Medicaid if the amount is over $2,000 so he loses his income and “health insurance” which will likely be a greater loss than any money left to him especially when there is a better alternative — using a special needs trust.
“OK, so how would a special needs trust help Richard?”
First, let’s talk about exactly what is a special needs trust as this will explain how it helps.
A special needs trust in this context is called a “third party” special needs trust because it is set up and funded by someone other than Richard — it is funded by Richard’s parents and grandparents.
The money does not belong to Richard — instead it belongs to the trust. A trust is simply a legal entity — similar to a corporation or partnership or LLC.
A trust, which can have a few hundred dollars in it or millions, will have a “trustee” which is someone who decides what to do with the money in the trust. But these decisions are controlled by the instructions laid out by the creator of the trust.
In a special needs context, the instructions will be to use the money to supplement — to build upon — the benefits already received through Medicaid or SSI.
By setting it up the proper way, Richard will not lose his important governmental benefits. And he will still have the benefit of the money so it is the best of both worlds.
“So what can the special needs trust money be used for?”
Basically anything that the disabled person — Richard in our example — needs. There are some exceptions but the general idea is anything that supplements the life of the disable person.
Here are some examples:
- Appliances (TV, refrigerator, etc)
- Dental work not covered by Medicaid
- Elective surgery
- Funeral expenses
- Hair cuts
- House cleaning services
- Legal fees
- Musical instruments and lessons
- Over the counter medications
- Pets/vet bills
- Therapy (physical or emotional as long as not covered by Medicaid)
- Vacation including a personal assistant to travel if necessary
The concept is “don’t duplicate what the government already provides” but outside of that, whatever is needed is normally allowed.
“Is it legal to set up a special needs trust? Seems like the government would not want people to do this.”
These are valid questions and the answer is it is legal to set up a special needs trust as long as the rules are followed and the government encourages families to do this.
The rules laid out in federal law are well established and tell us how to set up a special needs trust and what it can be used for and what it can’t be used for.
The reason the government wants families to set these up is because everyone, including the government, knows that for a disabled person to live a full life, SSI and Medicaid are not going to cut it. Families should help their disabled relatives and a special needs trust is the way that the government allows us to this important act of love.
“What if I want to learn more about a special needs trust in Alabama?”
There are several options for you to learn more. We will be doing a 30 or 60 minute webinar on special needs trusts in Alabama that you are welcome to participate in — the date has not yet been nailed down but you can contact us to find out the exact date and to be notified of it.
Or you are welcome to call us at 205-879-2447 or fill out our online contact form to set up a “Special Needs Analysis Meeting” in our office. Normally the cost of this is $500 as we cover your options for you after we find out your unique situation. Right now, however, we will waive this fee — you can just let the receptionist know you are wanting the free consultation you read about here.
If we can help you in any way, we look forward to doing so.