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Money can’t solve every problem. But financial security can make it much easier to have a good quality of life when you face ongoing physical, intellectual, or developmental disabilities. Special needs trusts are an excellent planning tool for creating lifelong financial security and stability for people in these circumstances.
Here’s an overview of how they work.
What is a special needs trust?
A special needs trust sets aside financial resources for a disabled beneficiary in a way that preserves their current or future eligibility for means-tested public benefits. The trust is a legal entity with its own tax identification number and establishing documents. In some circumstances, it can also be referred to as a supplemental needs trust.
The benefits that a special needs trust can protect may include Medicaid, Supplemental Security Income (SSI), the Supplemental Nutrition Assistance Program, Children’s Health Insurance Program, Children’s Special Health Services, Temporary Assistance for Needy Families, and Section 8 Federally Assisted Housing.
When adequately funded, the trust provides assets to enhance the beneficiary’s quality of life by paying for things that public assistance may not. A special needs trust also provides someone — a trustee — to oversee the finances of an individual who may not have the capacity to manage their own money. Families often task siblings, banks, attorneys, or trust companies with this role.
Crucially, the trust binds the overseer to act as a fiduciary and provides civil remedies (such as compelling the trustee to repay misappropriated funds and removal from the position) for not using the trust assets in the beneficiary’s best interest.
Quality-of-life expenses can be almost anything: out-of-pocket medical costs, transportation, hobbies, club memberships, professional services, tuition, and more. Essentially, a special needs trust can allow someone with a disability to enjoy a comfortable lifestyle. (Learn more: How to find family balance with a special needs child)
Who is a special needs trust for?
While some trusts are primarily tools for tax-efficient intergenerational wealth transfers, that’s not the case with a special needs trust.
“It’s not just for rich families,” said Kelly Piacenti, head of SpecialCare at MassMutual and a mother of four, including a son with special needs for 19 years. “It’s for families who want to make sure their dependent with special needs can maintain the life they are accustomed to.”
A special needs trust is often used by parents who want to plan for a disabled child to have lifelong care even after they’re gone. Leaving assets directly to a disabled child in a will puts those assets in the child’s name, likely disqualifying them from receiving means-tested public benefits and potentially interrupting many aspects of their life, including which health care providers they see, which care aide provides them with personal services, and possibly even where they live.
Leaving a disabled child’s inheritance to a special needs trust can also protect those assets from predators — as long as the trustee is carefully chosen.
Types of special needs trusts
There are three types of special needs trusts. All are designed to keep the beneficiary under the asset threshold to qualify for Medicaid. This is possible because the trust, not the disabled individual, legally owns the assets and the trustee controls them. Further, the beneficiary never receives money from the trust, but only has expenses paid from the trust on their behalf by the trustee.
Each type of special needs trust has different rules about who can establish it, when it can be established, and how it can be funded. As such, almost any family should be able to create a special needs trust that suits their loved one’s circumstances.
Third-party trust
A third-party special needs trust must be established by someone other than the beneficiary. Typical grantors include parents, grandparents, legal guardians, or a court.
When to use it: To leave an inheritance through a will, revocable living trust, or payable-on-death designation before the beneficiary’s 65th birthday.
First-party trust
Also called a qualified self-funded or self-settled special needs trust, a first-party trust is funded with assets that are in the disabled person’s name.
When to use it: When the disabled individual receives a settlement (for example, from an accident that caused the disability) or a poorly planned inheritance. Ideally, an inheritance should be left to a third-party special needs trust.
Note: Both third-party and first-party special needs trusts must be established before the beneficiary turns 65, and no further assets can be added once the beneficiary reaches that age. However, the beneficiary can still spend the trust assets past age 65.
Qualified pooled trust
Also called a (d)(4)(C) trust, it’s managed by a nonprofit organization and pools funds with those of other disabled individuals for investment purposes. It can be funded by a third party or by the beneficiary.
When to use it: When the beneficiary has already turned 65; when the assets available to fund the trust aren’t sufficient to justify the cost of setting up a third-party or first-party trust; when the beneficiary doesn’t have any heirs; when leaving an inherited IRA to a disabled individual.
When to establish a special needs trust
Establishing a special needs trust is something you want to do sooner rather than later because of how critical it can be to your loved one’s future financial security and quality of life. Once that person has been diagnosed with a chronic long-term disability or a serious illness, it makes sense to start creating a financial plan based on these new circumstances.
“A common mistake parents make with special needs trusts is not setting one up because they don’t have any money to put into it,” Piacenti said.
As noted earlier, parents or caregivers often fund a special needs trust at death by transferring their assets through payable-on-death designations and beneficiary arrangements. Funding sources can include retirement assets, bank account balances, and even real estate (such as a primary residence).
Many families will set up a third-party trust that will be funded by a life insurance policy when the first or second parent dies, Piacenti said. “You don’t have to set the trust up and immediately fund it. It can sit there for 10 years as long as you have it updated. But once it’s there, you — or anyone else — can put money in it.” (Related: How to set up a trust)
The key is this: If you want to provide for your loved one, you have to take action during your lifetime to set something up — such as testamentary language in your will that establishes a trust upon your death. You don’t know when you’ll die (or become incapacitated). So, there’s no time like the present. Yet, people tend to put it off.
“It’s a tough decision for families to think about, because it can be hard to accept the challenging circumstances you’re in,” Piacenti said. “Plus, you have to go to a qualified attorney, not just a regular attorney — they have to specialize in special needs or elder law.”
Terminating a special needs trust
Another concern is what might happen with a special needs trust if the beneficiary’s needs decrease.
You may not know whether your loved one will always be disabled and unable to support themselves financially at a comfortable level. Even a situation that seems permanent now could be improved by advances in medicine, technology, or workplace accommodations.
The good news is that you don’t have to know. It’s standard practice to include language in the trust documents allowing the trustee to terminate the trust under the appropriate circumstances (including the beneficiary’s death).
How MassMutual can help
It’s important to consult financial, tax, and legal advisors when creating a special needs trust. A MassMutual financial professional may be able to help.
“We have over 500 financial professionals who work with special needs families, and 65 percent of them are special needs parents, siblings, or caregivers,” Piacenti said. “They’re in this program because they have a real reason to be there. They live with this day in and day out. It’s a passion for a lot of our professionals.”
Regardless of your financial means, you can reach out to our SpecialCare Planners.
“We speak with anyone who has a question or concern,” Piacenti said. “If we can provide information or education and it relieves a little bit of that pressure, that’s a win. We also work with several national nonprofits that can provide support and services on a local level.”
Discover more from MassMutual…
How to craft a financial strategy for your special needs family
How siblings can approach special needs situations
ABLE accounts: pre-tax help for disability costs
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