What is a Special Needs Trust and How Do They Work?
Raising a special needs child while trying to plan their financial future is often overwhelming. I get it. Navigating a legal maze of government programs and trust strategies is scary. You want to nurture your child’s life.
But, there are options like special needs trusts that, if structured right, can provide resources without risking benefit eligibility.
I know it’s overwhelming to understand it all now on top of daily care duties. But tuning out the noise and focusing on understandable solutions one step at a time is doable.
What is a Special Needs Trust?
A special needs trust, sometimes referred to as a supplemental needs trust, is a legal arrangement created to benefit a person with a disability. The trust aims to provide additional financial support without affecting the beneficiary’s eligibility for government benefits programs like Medicaid and Supplemental Security Income (SSI).
Assets placed into a properly drafted special needs trust are not counted toward the resource limits for means-tested government benefit programs. This allows the beneficiary to maintain eligibility for essential medical and income assistance while receiving extra support from the trust funds.
Under Minnesota law, a special needs trust can pay for medical care, transportation, education, recreation, and other expenses that government benefits do not cover. The funds supplement but do not replace public assistance.
How Does a Special Needs Trust Work?
A special needs trust is established by someone other than the beneficiary, typically a parent, grandparent, guardian, or court. This third party is known as the grantor or trustor. They designate a trustee who manages the trust and distributes funds according to the trust terms for the sole benefit of the disabled beneficiary.
The beneficiary does not have direct access to the trust funds. The trustee makes disbursements for supplemental needs at their discretion. Any assets remaining in the trust at the beneficiary’s death can be passed to other beneficiaries named by the grantor.
The trust must be set up and funded before the beneficiary turns 65 and be irrevocable. As an irrevocable trust, its terms cannot be changed once executed. The assets are also protected from creditors and lawsuits.
Types of Special Needs Trusts
There are two main types of special needs trusts under Minnesota law:
First-Party Special Needs Trusts
A first-party special needs trust is funded with assets belonging to the beneficiary with disabilities. Often, these trusts are used to shelter funds from a personal injury settlement or inheritance.
The trust must contain a payback provision requiring Medicaid to be reimbursed from any remaining trust funds upon the beneficiary’s death. These first-party trusts must be set up before age 65.
Third-Party Special Needs Trusts
They are also referred to as a supplemental needs trust, a third-party special needs trust funded with assets belonging to someone other than the beneficiary. Parents often establish these trusts to provide for a child with disabilities.
Because the assets originally belonged to a third party, there is no payback requirement. The grantor can name the remainder of the beneficiaries to receive funds after the beneficiary’s death.
Creating and Funding a Special Needs Trust
An attorney drafting a trust document that conforms to federal and state laws creates a special needs trust. The document should clearly define the trust’s purpose, instructions to the trustee, and distribution rules.
Once signed, the trust can be funded in various ways, such as:
- Cash gifts from parents or relatives
- Inheritances or assets from wills/estates
- Proceeds from a lawsuit
- Disability benefits like SSI or SSDI payments
Specific rules govern what assets can be put into first-party vs. third-party special needs trusts. An experienced special needs planning attorney can advise on adequately funding the trust.
Benefits of a Special Needs Trust
There are many reasons special needs trusts can be constructive for disabled individuals and their loved ones:
- Maintains eligibility for SSI, SSDI, and Medicaid – Trust assets are not counted toward program resource limits, allowing continued benefits.
- Access for gifts, inheritances, proceeds – Allows beneficiaries to receive monetary gifts, inheritances, or lawsuit proceeds that would typically affect eligibility.
- Pays for supplemental needs – Medical costs, transportation, caretakers, and equipment not covered by government benefits.
- Enhances quality of life – Provides access to better medical care, recreation, education, and housing than public assistance allows.
- Protects assets – As an irrevocable trust, assets are protected from creditors and shielded in lawsuits.
- Peace of mind for family – Ensures beneficiary will be cared for when parents/guardians are gone.
Contact A Minnesota Special Needs Planning Attorney
The Safe Harbor Estate Law attorneys understand the rules surrounding special needs trusts and stay up-to-date on any legal changes affecting them. The Safe Harbor legal team can advise families on whether a special needs trust is appropriate.
They can also guide families through each step of establishing a properly structured trust customized to support the long-term needs of disabled children or dependents.
Anyone interested in learning more or scheduling a consultation with a lawyer to discuss planning options may visit https://safeharborestatelaw.com/ to explore the next steps.
