How Special Needs Trusts Work

by Advice Chaser
by Advice Chaser

Having assets as a disabled person can be a problem. Owning too much can destroy your eligibility for benefits. Or, if you’re the parent of a disabled person, it can be difficult to provide for your child in your estate plan without jeopardizing their income. ABLE accounts are one solution to this problem. But many families choose a special needs trust, which can be more flexible.

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What Is a Special Needs Trust?

Trusts are a common legal structure where one party (the trustee) holds money for the benefit of another party (the beneficiary). They’re common in charitable work, estate planning, and more. In the case of a special needs trust, it involves setting aside assets for a disabled person, but without them technically owning the assets. This way, these assets don’t affect their eligibility for benefits.

Each trust has its own rules for how the money in them can be used, but in general, funds are used for things benefits don’t cover, such as therapy not covered by Medicaid, accessibility supplies, education, and so on. If the beneficiary has a disability affecting their ability to handle their own finances, the trust can include third-party oversight of spending.

A special needs trust must be set up by a lawyer. This can cost a significant amount. The agreement will specify where the funds come from, the trustee(s) responsible for administering the trust, the beneficiary, the limitations on how the assets can be used, and who inherits the assets after the beneficiary passes away.

Types of Special Needs Trusts

There are three main types of special needs trusts. A first-party trust is something you might set up if you are disabled and want to apply for benefits. You can fund it with your savings, an inheritance, or a legal settlement. One unique requirement of this type is that, after you die, the money in the trust is used to reimburse Medicaid for the benefits you have used.

A third-party trust is funded by someone else (called the grantor). Parents or caregivers of a disabled person might choose to set up one of these. Instead of giving your loved one money outright or leaving it to them in your will, you can put it into a third-party trust so that they can use it without affecting their benefits. You can fund it with money you have now or have it set up so it will be funded with your life insurance.

Lastly, there are pooled trusts, which are trusts you can set up with a non-profit organization which manages the trust. The money you contribute still goes to the beneficiary you choose, but the organization takes on the duty of administering the trust. Organizations in every state offer pooled special needs trusts to make it easier for families to set up a trust for their needs.

ABLE Account vs. Special Needs Trust

Much of what a special needs trust does can also happen in an ABLE account. Both are arrangements allowing a disabled person to have assets without affecting their benefits. But there are a few key differences:

  • An ABLE account is significantly cheaper to set up, since you don’t have to hire a lawyer.
  • ABLE accounts can only be set up for a person who has been disabled before the age of 26, while special needs trusts have no age limits except for a first-party trust, which must be set up before the beneficiary turns 65.
  • A special needs trust has no maximum amount that can be in the trust without affecting benefits, while an ABLE account starts affecting benefits at $100,000. ABLE accounts also have annual contribution limits, whereas a special needs trust can be funded all at once with a lump sum of any size.
  • While an ABLE account can be used for “qualified disability expenditures”—anything affected by disability, including food and housing, funds from a special needs trust can’t be used for food or housing without affecting SSI. 
  • While an ABLE account can only hold cash, a special needs trust can also hold other assets, like a home.

So when might you use each one? An ABLE account is often best when the amount of money you want to protect is small. It’s easy for the account owner to save unused SSI benefits in it, deposit gifts, or protect a small settlement. A special needs trust makes more sense if the family has a large inheritance or life insurance benefit to pass on. Other considerations include the age at which the disability began, the types of expenses the beneficiary has, and the cost of legal assistance.

Weigh the Pros and Cons

Before running out to hire a lawyer, it’s a good idea to talk with a financial expert who’s experienced in disability planning. They can help you decide if you really need a special needs trust, or if you can handle your needs with something simpler to set up. To reach a special needs financial advisor, contact us today. We’ll connect you with one of the experienced professionals on our list.

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