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Do you have a child who is disabled? Are you interested in setting up a trust to give them assets after your death? Are you concerned that their inheritance would disqualify them from receiving public benefits? If so, you may consider a special needs trust to provide for your child or loved one without touching their public assistance.
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What is a Special Needs Trust?
A Special Needs Trust, also known as a supplemental needs trust, is a legal tool designed to hold and protect money for a person with disabilities. The purpose of the special needs trust is to provide supplementary money to the person with disabilities without disqualifying them from public benefits such as Medicaid, Medicare, Supplemental Security Income (SSI), and Social Security Disability (SSDI).
Without a Special Needs Trust, certain assets, such as gifts and inheritances, will be counted as a resource and may disqualify your child from receiving public benefits. Therefore, parents of children with special needs may consider a Special Needs Trust to protect their children after their child’s assets.
Special needs trusts are created and funded by a settlor and administered by a trustee. Special Needs Trusts are almost always irrevocable, meaning they cannot be changed.
Frequently Asked Questions About Special Needs Trusts
What can a Special Needs Trust pay for?
A Special Needs Trust can cover any expenses not covered by public benefits including:
· Recreation and entertainment
· Medical care not covered elsewhere
What is a settlor or grantor?
A settlor, also known as a grantor, is a person who sets up a trust for the benefit of the person with disabilities, also known as the beneficiary. In a first-party trust, the settlor and the beneficiary are the same people.
What is a trustee?
A trustee is a person who administers the trust and is responsible for using assets to benefit the person with disabilities. They can be an individual, bank, trust company, or other corporate entity.
What is a beneficiary?
A beneficiary is a person who benefits from the trust. All special needs trusts name the person with special needs as the beneficiary.
Who needs a Special Needs Trust?
Any person with disabilities may benefit from a special needs trust. When an individual receives state and federal assistance, such as Medicaid, Medicare, SSI, and SSDI, sizable income and inheritances may jeopardize the person’s ability to continue receiving benefits. To avoid disqualifying your loved one from public benefits, you may consider a special needs trust.
If you have a child with special needs, there are a few different options to protect your child’s inheritance and assets while maintaining public benefits qualifications. Learn more in the next section.
Three Types of Special Needs Trusts
- First-Party Disability Trust
- Third-Party Special Needs Trust
- Pooled Trust
1. First-Party Disability Trusts
First-party disability trusts, also known as self-settled trusts, can provide assets for an adult with special needs without disrupting or disqualifying them from their public benefits. A first-party special needs trust may be a good option when a person with disabilities has too many assets to qualify for Medicare.
In a self-settled trust, the grantor and beneficiary are the same people, and they fund the trust with assets or income belonging to the beneficiary. State and federal regulations govern the self-settled trust, and the Social Security Administration or the Colorado Department of Health Care Policy and Financing (HCPF) must approve it.
Who qualifies for a First-Party Disability trust?
To qualify for a first-party disability trust, the beneficiary (person with disabilities) must be:
- Over the age of 18
- Under the age of 65
- Disabled according to Social Security
Who creates a First-Party Disability Trust?
A parent, grandparent, guardian, or court creates a first-party disability trust.
When is a First-Party Disability Trust terminated?
If the beneficiary no longer requires Medicaid or moves out of Colorado, the trust must be terminated. Once the beneficiary dies, the trustee must pay back Colorado Medicaid (HCPF) for any medical expenses paid by the state for the beneficiary.
2. Third-Party Special Needs Trust
Unlike a first-party trust, a third-party special needs trust is created and funded by someone other than the beneficiary. The trust owns the assets, not the beneficiary, and therefore the assets cannot be accessed by creditors. When the beneficiary dies, the trust passes to a successor named by the beneficiary.
This type of trust is ideal for parents who wish to gift assets to their adult children with special needs without disqualifying them from their public benefits. A typical trust does not always protect assets from Medicaid. In contrast, a special needs trust protects assets from Medicaid and creditors.
When can you create a Third-Party Trust?
Third-party special needs trusts can be created while the beneficiary is alive, inter vivos, or upon the death of the beneficiary, testamentary.
3. Pooled Trust
Do you not have a viable candidate to serve as trustee? Are you concerned about setting up a separate special needs trust? If you answered yes to one of these questions, a pooled trust could be a good alternative.
What is a pooled trust?
A pooled trust is a special needs trust run by a nonprofit organization that pools and invests funds for many families. Each trust beneficiary has a separate account and the trustee, elected by the nonprofit, spends the money on behalf of each beneficiary.
It may be easier for a family to enter a pooled trust versus setting up a third-party special needs trust since a person with disabilities can join a pooled trust without court involvement or assistance from a parent, guardian, or grandparent.
Unlike other special needs trusts, pooled trusts do not pay Medicaid after the death of a beneficiary. Instead, money goes into a charitable fund for the remaining beneficiaries. Because of this, beneficiaries are not taxed on their earnings.
Who administers a pooled trust in Colorado?
Founded in 1994, Colorado Fund for People with Disabilities (CFPD) is the longest-running pooled trust available to Colorado residents. This pooled trust was founded in 1994 and it has been approved by Colorado Medicaid and the Social Security Administration.