Protecting Your Estate’s Beneficiaries with a Special Needs Trust

Sometimes, the worst thing you can do for a beneficiary of your estate is to leave him or her property directly. For people with disabilities, this is especially true. If you have a disabled beneficiary that depends upon government assistance that requires that they prove that the need the help (think Medicaid or Supplemental Security Income, or SSI), receiving money from your estate outright could be a big problem.

 

What’s the problem with receiving property outright?

 

In a need-based program, the recipient’s assets and income usually have to fall beneath a particular threshold. For instance, a disabled person receiving Medicaid assistance through MO HealthNet must have assets worth less than $1,000 for an individual, or no greater than $2,000 for a married couple. That’s a low limit, and it’s easy to see how quickly money from an estate could push someone over that limit.

If someone goes over the assets limit, then, they become ineligible for MO Healthnet or other types of needs-based assistance. Without the assistance, the person usually goes through the money he or she got from the estate, and then once it’s gone, then they’re eligible for assistance again. That might not sound so bad–they’re back where they started, I suppose–but there’s a better way to handle that money to improve the disabled individual’s quality of life.

 

What is a special needs trust?

 

That way is called a “special needs trust.” A special needs trust is designed to hold assets for the disabled person’s benefit and restrict payments from the trust so the payments don’t ruin the disabled person’s eligibility for government assistance.

There are two main kinds of special needs trust:

  • First-party/Self-settled. In a first-party SNT, the disabled person funds the trust with money or property he or she already has. For instance, gifts or inheritances the disabled person has already received or proceeds from lawsuits payable to the disabled person are often used to fund first-party SNTs. First-party SNTs protect assets from exceeding the asset limit cap of the various needs-based assistance programs, but for Mo HealthNet, the trust would have to pay back Medicaid with the trust assets remaining at the disabled person’s death.
  • Third party. In a third-party SNT, the trust is funded with money or property that doesn’t yet belong to the beneficiary. When the beneficiary dies, any remaining assets of the trust are not subject to Mo HealthNet payback.

Either way, the trust has to be restrictive about what trust funds can pay for. Without those restrictions, the assets in the trust count for the support of the beneficiary (which is what we’re trying to avoid here!). The SNT must specifically provide that the assets can’t pay for basic support. Also, the SNT cannot pay for things that the needs-based government assistance could pay for.

So what can you use the assets for? This isn’t an exhaustive list (and if you’re a trustee, you should be up on this or be getting advice about it), but here are some examples:

  • Medical or dental care not covered by assistance
  • Personal care services
  • Internet/television/telephone service
  • Professional services
  • Classes–either academic or for personal enrichment
  • Sporting goods or fitness equipment
  • Transportation

 

Who should be the trustee of the special needs trust?

 

There’s one person who absolutely cannot be the trustee of the SNT: the disabled person. Giving that person control of the assets would make the assets of the trust a countable asset.

It’s tempting to make yourself or a relative the trustee of the SNT, but I would suggest you be careful about doing that. While you or a relative might be willing to administer the trust for free (which is great for the beneficiary), if something gets messed up, it’s going to cause problems for the disabled person. You might consider a professional administrator. Some banks will handle administration, and non-profit organizations like Midwest Special Needs Trust (and this isn’t an ad for them, they don’t know I mentioned them) will handle it. They’re more likely to avoid mistakes, but they will charge fees and probably have minimum asset balances or opening deposits.

 

How would I get started on creating a special needs trust?

If you’re working with an organization that administers SNTs, they may have documents to establish the trust. Additionally, you may want to consult an attorney to make sure the trust is established properly. While it might be tempting to try to go the do-it-yourself route, you don’t want a small mistake to result in the trust failing to protect your beneficiary’s assets. You should seriously consider having a professional create the trust.

 

Enjoy this article? Learn more with the Missouri Estate Planning Guide!

 

Photo credit: Andrés Canchón, via unsplash.com

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