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Special Needs Trust Explained | How It Works

A special needs trust (SNT) is a tool to help you provide financial security to your child after you die without leaving them ineligible for government assistance such as Medicare.

Particularly, a special needs trust is a legal agreement, which typically a parent or guardian sets up. It ensures that assets like money or a life insurance policy, are held in an account and for the use of supporting the child.

Special Needs Trust – How It Works

Markedly, the funds belong to the trust, not the child, so they are not put into consideration when deciding your child’s government benefits eligibility. It is created to supplement the child’s government benefits.

Significantly, the laws regarding special needs trusts have a lot of complexity. For that reason, it is important to higher a skilled attorney to help.

Special Needs Trust Benefits

A special needs trust plays an important role in your child’s long-term welfare and offers several benefits.

  • Assets within the trust are not considered when determining eligibility for government programs like Supplemental Security Income (SSI) and Medicaid.
  • The assets are available for a variety of expenses.  These are expenses which government benefits don’t cover, including out-of-pocket medical or dental costs, personal caregivers, rehabilitation services, education, vacations, vehicle or home repairs and recurring bills.
  • Parents choose the administrator or “trustee” of the trust. Common options include existing family members and professional trustees.
  • Trustees have a fiduciary responsibility to act in the best interest of the beneficiary.
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However, the benefits of a special needs trust can end in several ways such as when:

  • The trust runs out of funds.
  • The beneficiary no longer qualifies as someone with a disability or special needs.
  • The beneficiary passes away.

Chiefly, a special needs trust exists to supplement government benefits, not to replace them. The use of the funds can be in any way the it approves, as long as they aren’t spent on things the beneficiary is already receiving assistance with. To this end, some common needs SNTs pay for are:

  • Educational expenses, such as tutoring or special needs schools
  • Entertainment and travel expenses
  • Home modifications or accessibility modifications
  • Medical and dental expenses not covered by insurance
  • Professional care services, such as housekeeping, personal care or companionship
  • Rehabilitation and therapy services
  • Transportation and vehicle expenses
Is a Special Needs Trust Right For You?

If you’re the parent or guardian of a child who may not be able to financially support themselves due to a disability or medical condition, then you should consider establishing a special needs trust. That can help the child access additional financial resources without disrupting their access to government benefits.

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Above all, it is crucial that parents’ assets, when the die, pass correctly to their child. That is to ensure that the child inheriting them doesn’t lose access to government benefits as a result. And an SNT is an instrument for passing the assets correctly.

Special Needs Trusts Types

Generally, there are three types, they are:

Third-Party Special Needs Trusts

Another name for this is a “family trust”. A family member or an individual responsible for the care of the beneficiary sets it up. The grantor can also choose the manner of spending of funds.

Furthermore, the guarantor can fund the it during their life by transferring assets into it. The guarantor can also fund it using a life insurance policy.

First-Party Special Needs Trusts

In this case, you establish the first-party trust with the beneficiary’s assets. They are usually created when the special needs individual receives an inheritance, a life insurance payout or personal injury settlement which could affect their eligibility for government benefits.

However, when the beneficiary dies, its assets will go toward repaying the total lifetime medical assistance benefits. If there are any remaining assets, it can then distribute them to any beneficiaries.

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Since third-party trusts do not require this repayment, they are preferable to a first-party trust.

Pooled Trust

For this case, the non-profit organization manages the trust. This relieves the grantor of having to select a trustee who may not have experience in managing trust assets. Of course, it still holds the assets solely for the benefit of your loved one.

Setting Up a Special Needs Trust

Generally, you should follow this steps when setting it up:

  • Consider your child’s long-term needs
  • Seek professional legal help: Laws surrounding these trusts have a lot of complexity so this is necessary.
  • Select a trustee
  • Establish the trust
  • Funding it. You can transfer assets or buy a life insurance policy to fund it.