In estate planning, trusts are a valuable tool for people who want to provide funds for others and avoid some of the issues of probate. Special needs trusts work similarly to traditional trusts but provide a service to those needing special health care.
Special needs trusts have a set of pros and cons that you should consider before putting in the time and money to create one. At the same time, these powerful tools aren’t suitable for every family and situation.
Special needs trusts seek to provide income to any individual who needs special medical attention and care. They work similarly to a traditional trust, where a grantor appoints a trustee who distributes funds and approves requests for money from the account. The trustee can be the beneficiary, but in many cases, it is a third party who will determine the eligibility for someone to use trust money for expenses.
Special needs trusts are less flexible than traditional trusts, which are already more difficult to alter than other methods of passing on wealth. Where many estate planning documents give the beneficiary a wide latitude on how to spend the money, a special needs trust is mostly for expenses related to medical needs.
There are also a few regulations regarding who can set up or have a special needs trust, what happens to the money, and what you can spend it on, such as:
Before setting up a special needs trust, you should speak with an estate planning attorney to determine eligibility and whether the plan is right for your situation.
Perhaps the biggest disadvantage of a special needs trust is the lack of control a beneficiary will have over the situation. The beneficiary does not have direct control of the funds and, instead, has to request money every time they wish to use them. This scenario can lead to tension between the trustee and the beneficiary, as the lack of independence in the situation can weigh on people over time.
Special needs trusts are also only used for medical expenses. If the beneficiary needs assistance with paying the rent or shopping for groceries, they will need to find other avenues to get those funds.
Special needs trusts are subject to Medicaid repayment rules in many instances. When the beneficiary dies, the funds in the trust will typically go to paying back any public assistance benefits the beneficiary received from Medicaid over the years. There are ways to avoid this repayment, and you should speak with an estate planning attorney about your trust before committing to it.
The creator of the special needs trust will also deal with some expenses when setting up and maintaining the arrangement. There are heavy costs to setting up a special needs trust, including an initial setup fee and annual fees. You will also need to pay for an attorney and, likely, a trustee to maintain the trust and approve requests for funds.
You’ll likely want to find a trustee to handle your special needs trust, as they can be difficult to take care of on your own. A professional can take all the difficulty out of maintaining the trust, though you will have to pay for their services.
A special needs trust does provide several advantages. Most importantly, these arrangements allow the beneficiary to maintain eligibility for government benefits, such as Medicaid.
Special needs trusts allow the beneficiary to have less of their income tied up in medical expenses and more for other needs, such as food and housing. While the special needs trust can’t pay for food, it can take some of the financial strain off the beneficiary, so their primary income can cover food expenses.
A: In a special needs trust, the beneficiary will need to seek approval from a trustee to see if they can use money from the account for medical expenses. The trustee will review the situation and decide whether to allow the money to go to the expense or deny the coverage.
A: Special needs trusts have a limited scope of the assistance they provide to the beneficiary. They must use the funds for medical expenses or things related to getting medical assistance, such as travel to a doctor’s appointment. The beneficiary can’t use the funds to buy food, and all purchases are only made at the discretion of the trustee.
A: A financial planner and an estate planning attorney can help you sort through the various options available to you in assisting your family and friends financially. Special needs trusts only help with medical bills, so you may want to create some additional arrangements to help them with things like food and housing.
A: Trust money is taxable in many instances. Special needs trusts also have other financial concerns as well. You’ll have to pay trust funds after a beneficiary dies to cover Medicaid expenses. Every trust is different, so speak with an estate planning attorney to see how your trust will affect your taxes.
It’s important to have an estate planning attorney on your side when you want to set up a trust or any other part of an estate plan. At Goebel Estate Planning, PC, I can help with your questions. Contact Hillary Goebel today to see how I can assist you with a special needs trust or any other estate planning needs.