If you have a loved one with special needs, you might consider setting up a special needs trust to help support that person financially after you die. If you leave money directly to a person with special needs, that gift will likely keep that person from qualifying for government benefits. Leaving money to a special needs trust, allows you to improve the quality of life for your loved one, without jeopardizing eligibility for benefits.
First, you must create the trust document. You do not need a lawyer to set up a basic no-frills special needs trust, and having one that you make yourself is often better than not having a trust at all. Special Needs Trusts, by Kevin Urbatsch and Michele Fuller-Urbatsh (Nolo) provides forms and instruction for creating a no-frills special needs trust, without a lawyer. However, many families will benefit from getting trust tailored to their specific situation. To get a personalized trust, consult a lawyer for help.
In the trust document, the person setting up the trust (usually called the "grantor" or "settlor") places property in the hands of another person to manage the trust (called the "trustee"). Typically, the grantor of a special needs trust names himself or herself as trustee and another trusted person successor trustee. The grantor serves as trustee until he or she dies, becomes incapacitated, or resigns; at that time the successor trustee takes over. Each person who serves as trustee is legally obligated to follow the terms of the trust document to use the property for the benefit of the person with special needs, identified in the trust document (the "beneficiary").
The trust will take effect when you sign it and have it notarized. Not long after that (when you get the trust's tax identification number from the IRS), you can add a little cash to the trust by opening a bank account with a minimal deposit. At that point the trust is ready to be funded through the wills, living trusts, beneficiary designations, or other estate planning tools of those who want to help support the beneficiary with special needs. (More on this below.)
Anyone (except beneficiary of the trust) can contribute property to a special needs trust. Although these trusts are most often created by parents for their children, you don't need any family relationship to create or give money to a trust for someone. And there is no limit to the number of trusts that may be created for a particular beneficiary.
Virtually any type of property can be held in a special needs trust, including real estate, stocks, collections, a business, patents, or jewelry. But because the primary purpose of a special needs trust is to use cash money to pay for items that aren't provided by SSI or Medicaid, special needs trusts typically give the trustee authority to sell tangible items (cars or jewelry, for example) to raise cash. In order to decide whether to keep or sell tangible items, the trustee will need a good understanding of the beneficiary's personal needs and basic sound investment rules. Learn more about The Trustee's Job.
The person who creates a special needs trust often makes the initial transfer of assets into the trust—usually, just a small amount of money. Then, commonly, a parent, grandparent, or other relative leaves property to the trust by:
Read more about How to Leave Property to a Special Needs Trust.
After the trust is funded, the trustee role becomes critical. The main job of the trustee is to use trust funds to support the beneficiary without jeopardizing government benefits. In order to do this, the trustee must have a good understanding about how eligibility works – and he or she must be willing to keep up with the law. The trustee also has many other duties, including paying taxes, keeping records, investing trust property, and keeping up to date with the beneficiary's needs. Learn more about The Trustee's Job.
Trust assets can be used for almost anything that is not illegal or contrary to the terms in the trust. Because the primary purpose of a special needs trust is to enhance the quality of life of the beneficiary with a disability, the list of things that can be paid for is quite broad. Generally, trust funds can be used to pay for:
Payments for food or shelter are more complicated because they generally trigger a reduction in SSI benefits. However, even though it's tricky, it often still makes sense for trustees to use trust funds for food and shelter because there are exemptions and rules that make the trade-off worthwhile.
On the other hand, trust funds cannot be used for things that would make the beneficiary ineligible for government benefits, such as large gifts of cash. Learn more about How Trust Funds Can Be Used and Payments for Food and Shelter.
The special needs trust ends when it's no longer needed. There are four reasons to end a special needs trust:
To learn more about special needs trust, go to the Special Needs Trusts section of Nolo.com.
This article was excerpted from Special Needs Trusts, Kevin Urbatsch and Michele Fuller-Urbatsch (Nolo).