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Parents want to provide for their children. If that child has special needs, the desire to protect and provide for that child takes on a whole new level because a child with special needs may never be fully independent. While parents may be tempted to give money or assets directly to these children, such gifts can affect whether that child is eligible for government assistance programs. A special needs trust, also called a supplemental needs trust, is a useful estate planning tool that allows families to provide financial assistance to an adult child without affecting their eligibility for needs-based benefits. We have previously discussed the types of expenses that a special needs trust can cover. If there is a person with needs in your family, it is important to determine the best trust structure for your family and your circumstances.
A special needs trust, generally speaking, is an irrevocable living trust that is designed to protect assets intended for a beneficiary with special needs without affecting their eligibility for needs-based governmental assistance programs.
A first-party special needs trust, also called a “self-settled” trust, is a form of special needs trust that utilizes the assets of the beneficiary rather than other parties like the beneficiary’s parents. First-party special needs trusts are useful where the beneficiary already has significant assets in their name, inherits property, or receives a court settlement. The trust can be created by the beneficiary’s family (parent, grandparent, or legal guardian), the court, or by the beneficiary themselves if they are legally competent and of sound mind.
The beneficiary must be disabled and under age 65 at the time the trust is established. The structure must be such that, upon the beneficiary’s death, any assets remaining in the trust are first distributed to the Medicaid programs to pay them back for the coverage. Remaining assets can go to other beneficiaries.
Third-party special needs trusts are often established by parents or grandparents of a person with special needs, although they can be established by anyone who wants to financially support the beneficiary (other than the beneficiary themselves). They can be included as part of a last will and testament, established within a living trust that is designed to avoid probate, or can be drafted as a standalone special needs trust. They are often meant to be funded upon the death of the parents of the beneficiary (or whoever else is establishing the trust) so that the beneficiary is taken care of after the parents are gone.
The trust is established using the assets of the third party for the benefit of the person with the disability, and it is generally structured so that income from the trust goes to other parties to pay for goods and services on behalf of the beneficiary rather than directly to the beneficiary. The assets in the trust are also unavailable to the beneficiary. Unlike with first-party special needs trusts, the remaining assets in a third-party trust after the death of the beneficiary do not need to be used to pay back programs like Medicaid.
A special needs attorney can help a beneficiary or trustee determine if a special needs trust is appropriate for your family, and help determine the best type of trust for your needs. Contact the knowledgeable, dedicated, and compassionate West Palm Beach trust and estates attorneys Shalloway & Shalloway at 561-686-6200.