A special needs trust differs from an Achieving a Better Life Experience (ABLE) account for the living expenses of people with disabilities.
2 Kinds of Special Needs Trusts
There are two different types of special needs trusts: the self-settled trust and the third party trust:
Self-Settled Special Needs Trust
The first type of trust, a self-settled special needs trust, is funded with the disabled beneficiary’s own assets, rather than the assets of a third party. This can include when damages are to be paid to an injured person. This trust is created and funded with assets belonging to the beneficiary. Sometimes the personal injury settlement or verdict arose out of the incident that created the disability, but not necessarily. Holding the settlement or judgment in a special needs trust permits the beneficiary to live with more dignity and comfort. The self-settled trust allows individuals to avoid spending down their own assets before qualifying for needs-based government benefits. The funds in the trust can be used to supplement benefits received from various governmental assistance programs including Supplemental Security Income (SSI) and Medicaid. The beneficiary must be under 65 years old when the trust is created and must be established by the individual’s parent, grandparent, legal guardian, or the court. The beneficiary does not have direct control or access to funds in the trust. It is managed by a trustee who has broad discretion to make distributions on behalf of the beneficiary to provide superior care options, opportunities for treatment and rehabilitation, housing, electronic equipment, computers, job training, vacations, and so on. In order for a self-settled special needs trust to be exempt as an asset for benefits qualification, it must pay back the government for services provided if there is anything left in the trust when the beneficiary with a disability or special needs dies, up to the amount paid under the Medicaid program for the disabled person’s care. Another type of self-settled special needs trust is a “pooled” trust. This is a trust created and administered by a nonprofit organization. Assets of many individuals that are disabled are contributed to the trust and separate accounts are maintained for each individual. At the death of the individual with a disability, if the account’s funds have not been exhausted, the remaining funds must either stay in the pooled trust to benefit the other trust beneficiaries, or must be used to pay back the state for amounts expended for care. Pooled trusts can be advantageous for individuals with disabilities that have modest assets. The third type of self settle special needs trust is the Miller trust. A Miller trust is structured to be utilized in a state that uses income cap requirements for Medicaid eligibility. This self settle special needs trust is different from the previous two as it can be created by an individual over age 65. It is designed to receive all the beneficiaries’ income and would not be treated as the beneficiary’s income for the purpose of the Medicaid income test. Trust disperse only up to the income qualification limit of Medicaid and retain excess income. At the beneficiary’s death, Medicaid is fully reimbursed for expenditures. It is important to note that not all states allow Miller trusts.
Third-Party Special Needs Trust
The second type of special needs trust is one that is created for the beneficiary by others. This trust is created by someone else (i.e., a third party) for the benefit of the child or disabled person, usually by a parent or grandparent, or other close family members that care for the minors covered in the trust. If you are a parent of a child with special needs, how you leave your child’s inheritance to him/her can greatly affect the child’s quality of life after your death. An outright inheritance will immediately cause all government benefits to stop. Your child will have to pay 100% of medical care expenses, medicines, personal care attendants, therapy, doctor visits, and room and board wherever they are living. This will continue until the entire inheritance is exhausted. Then your disabled child will re-qualify for benefits. If the inheritance is exhausted because it had to be spent down to re-qualify for benefits, there will no longer be additional funds to pay for education, over-the-counter medicines, trips to see family members, reading materials, basic supplies, or other expenses. Government benefits do not cover these types of expenses. Rather than giving the inheritance outright (or even worse, disinheriting the child with special needs), these parents should include special needs trusts in their estate plans. The special needs trust does not provide funding for basic food, clothing, or shelter. However, a wide variety of supplemental needs can be paid for. The trust might be able to buy a house for your disabled child to live in or could pay for an advocate that will make sure that your child receives the services they need. Grandparents and other relatives can add to the trust. When the child with special needs dies, the balance remaining in the trust can be distributed to other family members. It is important to note that this type of trust requires advance planning. It is important to talk to your estate attorney now to include it in your estate plan.
