To qualify for Supplemental Security Income (SSI) and Medicaid, you have to own less than $2,000 in assets. These two programs are intended to pay for basic living expenses and primary medical services, according to a recent article from Barron’s, “Kids With Special Needs Deserve Benefits. A Trust Protects Them.”
A Special Needs Trust (SNT) is used to pay for other expenses. This can be anything from the cost of having a cell phone to traveling for the individual and a companion. An estate planning attorney should create the trust in tandem with the family’s overall estate plan.
There are two types of SNTs to consider for high-income families, and a third, explained below, is useful for families of moderate means. The main difference between the first two SNTs is how the money left in the trust is distributed after the death of the disabled person.
In a third-party supplemental trust, the special needs family member doesn’t have access to the money at any time. The trustee designates a beneficiary if any assets are left in the trust upon the death of the disabled person.
A first-party supplemental trust is used for money received outright, such as from an improperly planned inheritance or an award from a lawsuit. Assets in these trusts can be used during the individual’s lifetime, but upon their death, Medicaid can take back benefits paid over the person’s lifetime before any remaining assets are distributed to beneficiaries.
Parents planning for their child’s well-being after their own deaths typically choose a family member who is close to the disabled person as their trustee. This is good thinking, with some limitations. The person who is the trustee needs to be financially savvy. Remember, the person with special needs may never receive money directly. If they do, their benefits are at risk.
Trustees need to know the details of SNTs so they don’t mishandle funds. For instance, funds in the trust should not be used for anything already paid for by SSI, like housing.
An alternative to privately created and managed trusts is a Pooled Trust. These are run by nonprofit organizations, which offer services like trustees for smaller accounts.
When it comes to retirement, parents need to address their retirement assets to enjoy their retirement years. They can fund SNTs by taking out life insurance policies. Life insurance policies make sense also because funds in trusts should be liquid. For younger parents in particular, term life might be a good option.
A warning for parents with SNTs who are tempted to leave all of their assets to their child with special needs: this is not necessary and could be problematic. Don’t forgo taking care of siblings, or resentment may lead to a family member resenting the family member with special needs.
Reference: Barron’s (July 27, 2024) “Kids With Special Needs Deserve Benefits. A Trust Protects Them.”