When (and How) to Use Special Needs Trusts in Your Estate Plan

Making gifts to one’s heirs is typically fairly straightforward. The grantor decides which of his or her heirs to make provisions for, figures out how much they should receive, and names said heirs in his or her estate planning instruments, such as wills and trusts. However, making gifts to heirs with special needs can be a bit trickier, particularly if those heirs rely on public benefits for most or all of their income and medical care. If you have heirs with special needs, you should speak to a Springfield estate planning lawyer to ensure that you do not inadvertently jeopardize their benefits. 

What Special Needs Trusts Do

Individuals with special needs often are unable to fully support themselves and may qualify for certain public benefits programs, such as Supplemental Security Income (SSI) and Medicaid. These programs have a number of eligibility requirements, but one of them is that the recipient’s income (the amount of money they make) and resources (the value of things they own) must be below a certain level. If an individual who is receiving SSI or Medicaid receives an unexpected financial windfall — such as an inheritance or proceeds from a lawsuit or divorce settlement — that increase in income can disqualify them from further benefits. 

Special needs trusts are specifically designed to avoid that outcome. With a special needs trust, inheritance proceeds do not go straight to the heir, but into a trust set up for their benefit with a trustee who exercises control over the funds. Those funds then are not counted as part of the beneficiary’s income or resources for public benefits eligibility purposes. 

When to Use a Special Needs Trust

There are several scenarios in which you might want to consider a special needs trust as part of your estate plan. They tend to be most advantageous in the following cases: 

• Your heir has a current and permanent special need and is currently receiving public benefits 
• Your heir has a condition that likely will require them to need public benefits in the future
• Your heir has a current special need and is currently receiving benefits, but may not need public benefits permanently 
• Your heir has a special need and is not receiving public benefits, but nonetheless cannot manage his or her finances appropriately

Special needs trusts are most commonly established by parents and grandparents for their children and grandchildren with special needs. 

How to Fund a Special Needs Trust

There are two primary mechanisms by which special needs trusts may be funded: first-party special needs trusts and third-party special needs trusts. 

• First-party special needs trust: First-party special needs trusts are established by a parent, grandparent, guardian, or court for the benefit of an individual with special needs using that individual’s own funds. 
• Third-party special needs trust: Third-party special needs trusts are established with resources provided by someone other than the beneficiary or his or her spouse (such as through a will or trust)

First-party special needs trust are common in scenarios in which an individual knows that he or she will become disabled at some point in the future and preemptively places assets into the trust to preserve his or her public benefits eligibility. Third-party special needs trusts are common in scenarios in which a third party wishes to gift or bequeath a disabled individual a sum of money, such as through an estate plan. 

The trustee of a special needs trust may not be the trust’s beneficiary. First-party special needs trusts must be irrevocable, but third-party special needs trusts may be either revocable or irrevocable. Importantly, any assets remaining in a first-party special needs trust must be paid to the state upon the beneficiary’s death, up to the total amount of public benefits paid to the beneficiary during his or her life. 

How Special Needs Trust Funds Can Be Used

Given that special needs trusts are explicitly designed to circumvent certain income eligibility requirements of public benefit programs, there are strict limits on how their funds may be used. Special needs trusts generally may be used to cover expenses not covered by SSI or Medicare or for assets that are not considered “countable” under either program. 

Expenses that special needs trusts generally may be used to pay for include: 

• Insurance 
• Vehicles and other travel expenses
• Medical and dental expenses not covered by Medicare 
• Medical equipment (i.e., wheelchairs, walkers, adjustable beds) 
• Home furnishings 
• Recreation and entertainment 
• Legal or guardianship expenses 
• Education and training 
• Burial expenses 
• Electronic equipment 

Expenses that special needs trusts generally may not be used to pay for include: 

• Cash 
• Gift cards
• Rent or mortgage payments
• Food and household essentials 
• Utilities 
• Property taxes
• Homeowner or condo association fees 

If you’d like to discuss which expenses you may use a special needs trust to pay for, please contact a Springfield estate planning lawyer. 

Pros and Cons of Special Needs Trusts

As with all estate planning instruments, there are both upsides and downsides to special needs trusts. The most obvious “pro” of special needs trusts (at least third-party ones) is that they allow the grantor to provide for an heir without jeopardizing that heir’s eligibility for crucial public benefits. The funds may also be used only for the well-being of the beneficiary, and in some cases are protected from creditors. But special needs trusts are not without drawbacks. One of the biggest is that they can be difficult to administer; their funds may be used only for certain expenses, which can increase the cost and time of trust administration. In the case of first-party special needs trusts, the funds must be used to repay the state upon the beneficiary’s death for any benefits received, which often drains them of their remaining value. 

Discuss Whether a Special Needs Trust Is Right for Your Estate Plan with a Springfield Estate Planning Lawyer

The best way to decide whether your estate planning goals would be served by a special needs trust is to speak to an experienced attorney. To get started, please contact a Springfield estate planning lawyer at LifeGen Law Group by calling 417-823-9898 or using our online contact form.