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What you should know about special needs trusts

On Behalf of | Apr 30, 2022 | Estate Planning

Individuals with a serious intellectual and/or physical disability typically receive federal benefits, including Medicaid and SSI, which have strict asset and income limits.

To protect their assets and maintain a high quality of life, specific parties can petition the court for a few types of special needs trusts.

First-party trusts

First-party special needs trusts are set up using the beneficiaries’ funds. However, a third party, such as a parent, can set up this type of trust for a child.

Personal injury lawsuit awards are common sources of the trusts’ funds. However, the trust removes the assets from their possession, so they fall below the income and asset threshold for federal. The beneficiary should be under 65, and the trust should be irrevocable.

Pooled trusts

Pooled trusts include both first- and third-party trusts. Although nonprofit organizations manage these funds, they are set up by the beneficiary, a guardian or the court. The nonprofit must keep all the trustee accounts separated, and upon the beneficiaries’ deaths, the government takes the trusts’ funds to repay assistance programs, such as Medicare.

Third-party trusts

If someone other than the trustee, such as a parent, funds the trust, it is a third-party special needs trust. These trusts are often set up through estate plans to ensure that the trustee has a high quality of life after their caregivers pass away.

The person who funds the trust chooses the trustee, and the beneficiary cannot decide what to spend the money on. The government cannot take the funds upon the beneficiaries’ death.

To maintain the trust and keep the government from deducting its expenses or canceling federal benefits, beneficiaries need to spend their trust funds on supplementary expenses, such as entertainment and transportation, and expenses not covered by government assistance programs.