Self-Funded Special Needs Trusts

What is a Self-Funded Special Needs Trust?

A trust is a legal document that provides for the control and distribution of assets held by a “trustee” for the benefit of another (the “beneficiary”). The assets in a trust may be money, stocks, bonds, real estate, business interests, or other possessions or assets. A trust should provide how assets are to be managed and distributed during the beneficiary’s life, and also how they are to be distributed after that person’s death.

A Special Needs Trust is a type of trust designed to protect the assets of a person with a disability. A “self-funded” Special Needs Trust must be created by a parent, grandparent, legal guardian or court to receive and hold assets (such as inheritance, lawsuit settlement, gifts) that belonged to the person with the disability, who is the beneficiary of the trust. The trust should direct the trustee to use the trust funds to supplement, but not replace, public benefits of the beneficiary. The Special Needs Trust must be managed by a trustee who is someone other than the beneficiary.


The Need


Individuals with disabilities who receive public benefits would benefit from having funds in a trust used to maintain their quality of life. When an individual who receives public benefits also receives money, the public benefits may be jeopardized. This situation may arise when the individual receives a personal injury or divorce settlement, an inheritance, or other funds. Regardless of the source of the funds, once the individual has money in his or her own name, the public benefits may be at risk. To protect the public benefits, the excess funds can be placed in a Special Needs Trust. A Special Needs Trust is used to supplement, not replace, public benefits such as Supplemental Security Income (SSI) or Medicaid. The trust assets should be used to purchase things that public benefits do not provide, and the Trustee should be aware of the impact of any distribution on public benefits.


What You Need to Know

Even if a trust is properly established and funded, if the Trustee improperly spends the income or principal of the trust, the public benefits of the beneficiary could be reduced or eliminated. The trust must be used solely for the benefit of the person with a disability. A Trustee should be familiar with investment standards and the expectations for maintaining trust records. The Trustee should be aware of the tax ramifications of distributions made from the trust. 

A Special Needs Trustee should be familiar with the types of public benefits available, the actual benefits received by the trust beneficiary and the requirements of the public benefits programs, such as SSI and Medicaid. The Trustee also should be familiar with other types of assistance for which the beneficiary qualifies, such as SSDI and Medicare, so that the Trustee does not waste trust assets on items that would otherwise be payable by public benefits. The trust assets should be used only to purchase something that cannot be purchased with public benefits and which, if purchased, will not jeopardize the benefits of the beneficiary.


Where to Go For Help


Public benefit rules and regulations are very complex and trusts of this type involve tax issues. Therefore, you should be cautious when determining who will administer a trust of this type. Involving a competent professional is important to make sure that the various regulations are met. Many Elder Law Attorneys have substantial experience and expertise concerning Special Needs Trusts. 


Administration of A Special Needs Trust

Individuals with disabilities often receive governmental assistance to maintain their quality of life. A Special Needs Trust is used to supplement, not replace, public benefits such as SSI or Medicaid. The Trustee of a Special Needs Trust spends the funds within the trust for the benefit of the beneficiary if the trust while carefully considering and monitoring the impact of such expenditures on the beneficiary’s entitlement to public benefits.


What You Need to Know

Even if a trust is properly established and funded, if the Trustee improperly spends the income or principal of the trust, the public benefits of the beneficiary could be reduces or eliminated. For example, if cash is paid directly to a beneficiary, it may reduce or eliminate the SSI benefit.

A Trustee should be familiar with investment standards and the expectations for maintaining trust records. The Trustee should also be aware of the tax ramifications of distributions made from the trust.

A Trustee should be familiar with the types of public benefits available, the actual benefits received by the trust beneficiary and the requirements of the public benefits, such as SSI, SSD, and Medicaid. The Trustee should also be familiar with other types of assistance for which the beneficiary qualifies, so that the Trustee does not waste trust assets on items that would otherwise be payable by public benefits. The trust assets should only be used to purchase something that cannot be purchased with public benefits and which, if purchased, will not jeopardize the individuals’ benefits.


Where to Go For Help


Public benefit rules and regulations are very complex and trusts of this type involve tax issues. Therefore, you should be cautious when determining who will administer a trust of this type. Involving a competent professional is important to assuring that the various regulations are met.

The Role of the Elder Law Attorney

NAELA, founded in 1987, is a national organization of Elder Law Attorneys devoted to the education and training of attorneys who can meet the needs of senior citizens and people with disabilities, and who advocate for the needs of such individuals. While NAELA Elder Law Attorneys work one-on-one with clients in their local areas, as an organization NAELA also examines and advocates on national public policy issues facing seniors in America including long-term health care; planning for retirement; estate planning and probate; guardianship and conservatorship; health care decision making.

This information is provided as a public service and is not intended as legal advice. Such advice should be obtained from a qualified Elder and Special Needs Law attorney.

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