When Is a Special Needs Trust the Right Choice?

More than 41 million Americans live with special healthcare needs. Of adults with special needs, more than 75% are unemployed and rely on government assistance and help from family members in order to meet their basic needs. When planning for your family member’s future, understanding special needs trusts and their alternatives will help you make the best decision and give you peace of mind knowing that your loved one’s needs will be met.

Types of Special Needs Trusts

There are two types of special needs trusts that are often established by estate planning lawyers. A first-party special needs trust provides for goods and services that aren’t covered by a government program. This type of trust acts as a supplement to Medicaid and Supplemental Security Income and doesn’t duplicate government benefits. This type of trust must be funded with the assets of the person with disabilities and include a provision for payback to Medicaid. Additionally, it can only be set up by the person’s parent, grandparent or legal guardian. Any assets left in the trust after the person with a disability dies would pass on to their family members.

A third-party special needs trust can be set up by anyone to benefit a person with disabilities. Gifts and bequests can be added to the trust without putting the person’s Medicaid eligibility at risk. The beneficiary’s assets are not used to fund the trust.

Drawbacks of Special Needs Trusts

While special needs trusts help provide for the future of your loved one, they do have some drawbacks that family members and friends must consider. Finding a trustee to manage the trust and its investments can be a challenge. The lack of control over the investments may also be an issue for some families. If these concerns overtake the benefits of establishing a special needs trust, family members or friends of people with disabilities may wish to consider alternative arrangements.

Outright Distribution of Assets

No law prohibits you or your family members from outright giving assets to your loved one with special needs. However, any such gift or inheritance could cause the person with disabilities to lose their eligibility for government benefits. For example, a person cannot have more than $2,000 in assets in order to maintain Medicaid eligibility. If the person loses Medicaid eligibility due to an inheritance, they would have to spend down those assets and reapply for Medicaid once their assets are less than $2,000, and there are time restrictions that must be met to regain eligibility. A person with special needs may not be able to manage the funds appropriately, and the funds might be spent in a way that doesn’t mesh with the giver’s intent.

Distribution of Assets to a Third Party

Some families choose to distribute assets intended for a person with disabilities to a trusted third party. For example, parents of three children, one of whom has lifelong disabilities, might choose to divide their assets between the two children who don’t have disabilities. They may tell their two heirs that they want a certain percentage of those assets to be used for the needs of the child with disabilities.

Because the assets would be held by heirs who aren’t receiving government benefits, the person with disabilities wouldn’t lose eligibility. However, there’s no guarantee that the heirs would actually use the funds as intended by the parent.

Factors to Consider When Deciding on a Special Needs Trust Versus Alternatives

You know your children, grandchildren and other family members, and your relationship with them may be one of your biggest factors in deciding whether to choose a special needs trust with an estate planning lawyer or an alternative to a trust. The amount of your assets, the ability to find a trustee and whether or not you can count on a third party to carry out your intent for your assets are all important considerations when deciding how to proceed.

For more information about special needs trust and their alternatives, contact The Knee Law Firm at (201) 996-1200. You may also fill out our online form, and one of our associates in Hackensack will reach out to you to schedule a consultation.