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Understanding the Basics of a Special Needs Trust: What Information Do You Need and How Do You Create One?

More than 29% of the American population care for a loved one who has special needs. This includes those who are chronically ill, aged, or disabled. A major concern is what happens after the caregiver passes away? 

How can you be sure your loved one has enough money to continue their care after you pass away? Simply leaving them money in your will is not a wise choice. Your other option is to create a special needs trust.

Not sure what that is? Keep reading to learn everything you need to know about what these trusts are and how to form one. 

What Is a Special Needs Trust?

These are special accounts that hold money for someone who is under the age of 65 and deemed disabled by the Social Security Administration. The purpose of the trust is to shield this money from consideration when the disabled person qualifies for their need-based benefits. 

The money in the trust is supposed to supplement the money award through Medicaid and Supplemental Security Income. When medical services are performed, whatever is not covered by Medicaid will then get paid by the trustee with trust assets. Typically, the trustee will pay the service provider directly. 

Government Benefits Implications 

Leaving someone a large sum of money who receives government assistance can cause more harm than good. When you leave money directly to the beneficiary, they now have legal control over the money, so it counts towards their assets when applying for government aid. This can place them outside the threshold of eligibility. 

Instead, a trust places the money outside the control of the beneficiary. Because of this, it doesn’t count towards their assets. 

What Can the Money Be Used For? 

While most people use their special needs trust to take care of medical expenses, their use is not limited to this. The money can go towards any benefit to the beneficiary’s life. This could include vehicles, home furnishings, vacations, personal attendants, and education.

What About Pooled Trusts?

When discussing special needs trusts, you may hear the term pooled trust. This is where a nonprofit corporation manages trust funds by investing them. Many different trusts will get pooled together for a combined strength in investing. 

Each trust in the pool has its own trustee and beneficiary account. These types of trusts work if you intend to leave a modest amount of money or you don’t have anyone you trust to be a trustee. 

Pay attention to the terms of the pooled trust. It is common to find a “no payback” clause. This clause states that when the beneficiary dies, their trust money remains in the fund for the benefit of the other members. 

Five Steps to Your Special Needs Trust 

Now that you know what a special needs trust is what you should create, there are five steps to creating one. 

1. Know the Need 

What is the purpose of you setting up the trust? It is important that you define what the purpose of the trust is. That way the trustee and advocate distribute the money in the way that you intend. 

2. Select the Right Type

Consider the beneficiaries capabilities when selecting the type of trust you want to make. Is the person capable of managing their money responsibly? 

A special needs trust holds the money from a grantor, and then a third party manages the money. While a self-settled trust holds money supplied by the person with the disability. This money usually comes from a personal injury award or inheritance. 

A pooled trust may be a good option if you only intend to leave a modest amount. It can also be an option if you don’t want to go through the process of forming a trust and selecting a trustee. 

3. Talk to a Pro

Hiring a knowledgable estate attorney is one of the three most important types of lawyers that every family needs to know. From there, you can start to look for a law firm or attorney that specializes in special needs trust. 

Once you find a special needs trust attorney that you feel comfortable with, you can begin to work with them to set up your trust. 

It can also be wise to speak with a financial planner and any case managers involved. These people can give professional opinions on any foreseeable required care and its financial implications. 

4. Select a Trustee 

You cannot form a trust without a trustee. This is the person that will manage the trust. You should trust them to make investments to grow the trust. They also need to be able to make disbursements responsibly. 

This person will also need to stay up to date on the latest government regulations. This will ensure that your trust remains compliant and valid. 

5. Select an Advocate 

Because of the specific circumstances of a special needs trust, you need to designate an advocate. This should be someone who knows you and the beneficiary well. You need to know that they will carry out your wishes while working with the trustee to provide for the beneficiary. 

You can work with your attorney to create a set of guidelines for the advocate and trustee. 

Trust Formation in a Will 

If you wish to have the trust formed upon your passing, all you need to do is state that in your will. Have your will state that if your intended beneficiary is deemed disabled at the time of your death, then you wish to place a specified amount in a special need trust. 

Be sure to list out your trustee, advocate, and trust terms. Any inheritance given to the beneficiary will then go directly into the trust and not to the beneficiary. 

Set up Your Special Needs Trust

It can be stressful to think about what happens to a loved one with special needs after you pass away. After all, you love this person; you want to make sure they are properly cared for. 

Setting aside money isn’t enough. There is no guarantee that the money will get used for the intended purpose. To know for sure that your loved one gets taken care of, you need a special needs trust.

Before you make your trust, be sure to know the pros and cons of putting a property in the trust. 

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