Who wants to plan for the worst?
Not many people — but here at Guiding Wealth, we believe that talking about all the possibilities, both good and unfortunate, is the key to feeling secure with your money and your family.
That’s why we recommend a comprehensive estate plan for everyone… especially for those who have a loved one or dependent with special needs. There may come a day when your estate will support them directly, and you want to ensure you don’t compromise their eligibility for government benefits.
Let’s dive into estate planning and special needs trusts (SNTs) so you can understand your options, make the best choice for your family, and feel prepared for any future!
What Is a Special Needs Trust?
Also called a supplemental needs trust, a special needs trust (SNT) is a legal arrangement that’s usually created by the parent or guardian of an individual with special needs. This type of trust is designed to provide financial support to an individual with a disability while still allowing them to qualify for government benefits.
Without an SNT, your loved one could become ineligible for crucial government benefits, such as Medicaid and Supplemental Security Income (SSI), when they receive inheritance money from your estate. An SNT, on the other hand, provides a designated place for funds to reside so that they aren’t considered assets belonging to the beneficiary.
Types of Special Needs Trusts
There are a few different ways to set up an SNT, and each one has potential benefits and disadvantages. Understanding the different options can make it easier to work with a financial planner to choose the best approach for estate planning.
First-Party Special Needs Trusts
This type of SNT is also called a “self-settled” or “(d)(4)(A)” trust, and it can be a good choice when the individual with disabilities has their own assets. You might also choose a first-party SNT for an individual who expects to receive assets via an inheritance or a legal settlement, such as a medical malpractice lawsuit or a divorce.
This type of trust is funded by the beneficiary. A person with a disability or complex medical needs could set up an SNT when they inherit assets or receive them via a court settlement.
A first-party SNT could also be useful if a person without a disability has assets in their own name and later becomes disabled. Setting up an SNT could allow that individual to meet the income and asset requirements to qualify for government benefits.
There are some legal restrictions on first-party special needs trusts. The assets in a first-party SNT may only be used for the beneficiary’s “sole benefit.” Additionally, the beneficiary must be under 65 years old when the SNT is established.
When the beneficiary dies, the trust must reimburse the government for Medicaid benefits. States may also have their own laws governing first-party SNTs, such as requiring the trust to be monitored by the court.
Third-Party Special Needs Trusts
If you would like to set up a special needs trust for a child/dependent with a disability, it will typically be a third-party SNT. You might be able to fund the trust with your assets, such as investments, retirement savings, real estate, or life insurance policies.
This type of trust can provide supplemental income to support the beneficiary while the grantor (e.g. parent/guardian) is still alive and also manage inherited assets following their death. Because this type of SNT is often funded by inherited assets, it’s commonly used in estate planning. Any person (except the beneficiary) may establish a third-party SNT, but in most cases, it’s used by relatives (e.g., parents, grandparents, siblings, etc.) of the beneficiary.
You can create a third-party SNT in your will or establish it via a living trust, which allows you to control your assets while you are alive, and then distribute your assets to beneficiaries should you pass. You can also create a standalone special needs trust that isn’t part of your estate plan.
If you create an SNT in your will, it won’t actually exist until you pass away. If you’d like the SNT to accept contributions from other donors (such as grandparents or family friends) before your death, a stand-alone SNT is a good choice.
Just like a first-party SNT, this type of special needs trust enables the beneficiary to remain eligible for government benefits. Additionally, a third-party SNT isn’t required to reimburse Medicare after the beneficiary passes away.
Pooled Trusts
You could also consider a pooled trust. This type of SNT is typically managed by a nonprofit organization. A pooled trust combines resources from several beneficiaries. There can be first-party and third-party pooled trusts. Each beneficiary has a sub-account within the trust and receives earnings in proportion to the portion of the trust they (or their grantor) funded.
Pooled trusts can be useful in situations where there isn’t a trustee who can manage the trust. This type of SNT can also reduce administrative fees, which can be especially useful for trusts with smaller amounts of money.
Because pooled trusts accept funds from multiple beneficiaries/donors, they can give beneficiaries with modest funds access to investment opportunities they may not qualify for on their own. Additionally, beneficiaries often have access to support services offered by the nonprofit managing the trust, such as housing placement and social programs.
Integrating a Special Needs Trust Into a Broader Financial Plan
Government benefits, such as Medicaid and SSI, can be crucial for individuals with disabilities and their families. A special needs trust ensures that you can provide financially for an heir without eliminating their access to those benefits.
Creating an SNT is an essential aspect of financial planning if you have a loved one with special needs. The trust can impact how you write your will, plan your retirement, and purchase life insurance. A financial planner can help you understand how the SNT fits into your overall financial plan and offer guidance on choosing the best type of SNT for your unique circumstances.
You may also want to talk to an attorney who specializes in trusts. Together with your financial planner, a legal expert can help ensure that your trust aligns with state and federal guidelines, reducing the risk of fees or penalties.
Are You Ready to Start Estate Planning?
Providing for your heirs is a crucial part of financial planning. If you don’t have an estate plan yet, now is the time to start working on your will and other essential legal documents.
If you have a child or loved one with special needs, a special needs trust can be a good addition to your estate plan. It allows your heir to access their inheritance without compromising their government benefits. A financial planner can help you determine which type of SNT is best for your family and incorporate it into your overall financial plan.
At Guiding Wealth, we help clients of all ages and circumstances with estate planning. Our team can help you with every step: creating your will, establishing a trust, choosing a life insurance policy, and planning your retirement. To get started, use our online calendar to schedule a consultation.