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Why and How to Use a Special Needs Trust

Paul Brandt
November 22, 2022

If you have a loved one with a disability, you may be considering how to support them today and into the future. Simply giving them money, though, could jeopardize their ability to receive government benefits, such as Supplemental Security Income (SSI) and Medicaid. Setting up a special needs trust offers another way to help improve their quality of life without putting those benefits at risk.

 

Why (and How) to Use a Special Needs Trust

 

What is the purpose of a special needs trust?

A special needs trust allows for the management of assets for individuals who have disabilities, without those assets being counted toward the income or asset limitations of certain government benefit programs.

For example, imagine someone who uses a wheelchair and receives SSI, as well as daily care paid for by Medicaid. If that person receives an inheritance, those funds could disqualify the person from getting benefits they’ve relied on. But if the inheritance money were placed in a special needs trust, the SSI and Medicaid benefits may still be allowed.

 

How can a special needs trust be used?

Special needs trusts are sometimes known as supplemental needs trusts because they are intended to supplement, not replace, the basic support provided by government programs. They typically can’t be used for food, utilities or other forms of basic support without reducing benefits.

But funds can be used in many ways to improve the person’s quality of life. For instance, funds may be used to purchase a home or car, to make accessibility updates and to cover healthcare expenses not covered by benefits or insurance. Funds can also be used for special equipment, therapy, education, furnishings, vacations, electronics, pet care and more.

As an example, imagine someone who was awarded funds from a court settlement over an injury that led to a permanent disability. Those funds could be put directly into a special needs trust and then could be used to buy a home with accessible features to accommodate the person’s disability. All without disrupting their eligibility for SSI and Medicaid benefits.

 

When might you want a special needs trust?

Special needs trusts are primarily used for people who need SSI or Medicaid assistance due to a permanent or severe disabling condition. A trust may also be helpful if someone doesn’t need those benefits now but may in the future because of a condition that’s likely to worsen.

Even if a person won’t need SSI or Medicaid, a special needs trust could be useful. For instance, if a loved one can’t manage their finances independently due to a mild development disability, autism or bipolar syndrome, the trustee would fill an important role in managing assets and administering spending decisions.

These trusts may also allow you to ensure there are sufficient funds available at a parent’s death to care for the child with special needs or allow you to treat all your heirs equitably. Assets within a trust are also protected from creditors, seizure and divorce proceedings, giving the beneficiary added financial security.

 

What are the types of special needs trusts?

There are two primary types of special needs trust. First-party or self-settled trusts are funded with assets that belong to the person with a disability, often from a personal injury settlement or inheritance. These are irrevocable trusts for the sole benefit of the individual with a qualifying disability, and they must include a Medicaid payback provision. This stipulates that any trust funds left after the beneficiary dies go first to pay Medicaid for benefits received during the person’s lifetime.

Third-party trusts are funded by assets belonging to someone other than the beneficiary, and could include life insurance payouts, gifts or inheritance. These trusts can be established and funded during the grantor’s lifetime or through their will. There is no Medicaid payback requirement, and the trust does not have to be exclusively for the person with special needs.

 

Next Steps

Special needs trusts can be complex and must meet specific criteria. That makes properly drafting the document and administering the trust critical. Most people will benefit from having the document created by an attorney with specific experience in special needs trusts. At Hancock Whitney, our trust team has more than 100 years of experience, and can answer your questions and help you create a special needs trust to support your loved one today and tomorrow.

 

 Talk to a Private Banker

 

 

The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.

This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.

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