When planning your estate, “What kind of trust do I need?” is a common question, but you also have to ask yourself, “What kind of trust do my loved ones need?”
For example, take individuals with special needs, such as physical disabilities, chronic health conditions, or intellectual and developmental disabilities (IDD). These individuals are eligible for certain government benefits, but only if they have a limited income—and if their income exceeds this threshold, they can be cut off from federal or state disability support. A qualifying individual is limited to a monthly income of $1,715 for the federal Medicare Savings Program, and in Tennessee, an individual’s annual income for continued Medicaid eligibility cannot exceed $34,490. If you give money to a qualifying individual in your will or through a normal trust, you can jeopardize their benefits. You may also eventually find yourself with special needs in the future and in need of a way to solve this dilemma.
The solution is to set up a specific trust fund for special needs individuals called a Special Needs Trust. In this article, our estate planning experts will walk you through what a special needs trust can be used for and provide advice for setting one up to maximize the benefits your loved ones with special needs can receive.
What Is a Special Needs Trust?
If you provide money for a disabled or special needs family member either as a gift while you are alive or as an inheritance after you pass on, even if you have the best of intentions, you could inadvertently end up cutting your loved one off from essential government benefits. Say, for example, you leave $25,000 to a family member who was disabled during military service—your gift, thoughtful as it was, could cut them off from Veterans Aid and Attendance and government housing.
A Special Needs Trust offers a way to provide financial support for a disabled loved one without jeopardizing their eligibility for government benefits. It acts as a trust fund for the special care they need and to provide comfort and quality of life. Instead of giving money directly to your loved one, a Special Needs Trust designates a trustee who spends money on the beneficiary’s behalf. The trustee has a fiduciary duty to act in the beneficiary’s best interests.
The ways trusts for special needs work can be complex. Let’s take a look at how they can be used and how you can set one up.
What can a Special Needs Trust be used for?
In Tennessee, a trust fund for loved ones with special needs can be used to cover the costs of:
- Medical and healthcare expenses not covered by Medicaid or other insurance, such as co-pays, deductibles, and other treatments
- Dental and vision care
- Alternative therapies or treatments such as physical therapy
- Prescription and over-the-counter medication
- Hiring a caregiver or personal assistant
- Respite caregiver
- Other specialized services for the beneficiary
- Utilities and maintenance costs for housing
- Modifications to make a home accessible, such as adding wheelchair ramps or grab bars
- Purchasing or modifying a vehicle to accommodate disabilities
- Assistive technology such as wheelchairs, hearing aids, etc.
- Basic living expenses
- Education or vocational training
- Travel for work or vacations
As you can see, a trust for special needs individuals can be used to provide your disabled loved ones with a better quality of life after you retire or pass away by providing money not just for healthcare-related expenses, but also to live a more fulfilling and complete life without cutting them off from means-tested government programs—as long as they are properly set up and used in accordance with Tennessee law.
Exploring Different Types of Special Needs Trusts
Are Special Needs Trusts revocable or irrevocable trusts? The answer depends on exactly how you set up your trust.
Trusts come in all shapes and sizes, and so do Special Needs Trusts. A trust for special needs individuals can be revocable or irrevocable, though most Special Needs Trusts do need to be set up as irrevocable trusts since the beneficiary usually cannot be given full control over the trust assets. Types of trust funds for special needs individuals include:
Irrevocable Special Needs Trusts
The vast majority of special needs trusts are irrevocable trusts. This is because the easiest way to preserve the eligibility of a loved one with special needs for government programs like SSI and Medicaid is to ensure that they cannot reclaim or remove the assets in the trust themselves.
Once you set up an irrevocable trust, the beneficiary cannot access the assets included in the trust themselves. Rather, the trustee disburses the assets based on need, understanding that they are required by law to act in the beneficiary’s best interests. There are several types of irrevocable special needs trusts, including:
First-Party Special Needs Trusts
Also known as self-settled or payback trusts, these trust funds for special needs individuals are funded with the beneficiary’s own assets, such as an inheritance or personal injury settlements. These special needs trusts ensure that a windfall from a lawsuit or inheritance doesn’t interfere with their eligibility for Medicaid or SSI.
These trusts are also called “payback trusts” because if there are any remaining unused funds in it when the beneficiary passes away, they must be used to repay Medicaid or other government programs for services provided.
Third-Party Special Needs Trusts
Third-party special needs trusts are more flexible than first-party trusts. Unlike first-party trusts, these trust funds for the special care the beneficiary needs do not contain the beneficiary’s own assets, but rather assets provided on their behalf by a benefactor. Because the assets do not belong to the beneficiary, the risk of losing means-tested benefits is low. A third-party special needs trust can contain life insurance policies, real estate properties, or investments.
Another significant difference between these types of irrevocable special needs trusts is what happens to the unused assets when the beneficiary eventually passes away. In a third-party special needs trust, the remaining assets don’t have to be paid back—they can simply be passed on to another person or an organization in accordance with the benefactor’s wishes.
Pooled Special Needs Trusts
Another type of Special Needs Trust is a pooled trust, in which the trustee is not a single person appointed to administer the trust but rather an entire nonprofit organization that manages multiple trust funds for special care. Each beneficiary has their own separate account and an individual appointed by the nonprofit to spend money on their behalf. The multiple trust funds all share the same pool of assets, effectively socializing special needs care across the involved beneficiaries.
Revocable Special Needs Trusts
While the vast majority of Special Needs Trusts must be set up as irrevocable trusts to prevent the beneficiary from losing their government benefits, a trust fund for special needs individuals can be set up as a revocable trust if eligibility for government benefits is not a concern.
You can use a revocable special needs trust in creative ways. For example, if a loved one in your family has special needs but is not yet eligible to receive SSI or Medicaid, their trust can be structured as revocable to cover their current needs, then converted to an irrevocable trust when they become eligible.
Provide the Financial Security Your Loved Ones Deserve with MHPS
Trusts are an essential part of planning for your estate and for the well-being of both you and your loved ones. But because no two individuals or families are alike, knowing what kind of trust you need to provide for yourself and your loved ones can be a difficult question.
If you or a loved one need a trust fund for special needs without jeopardizing eligibility for government benefits, MHPS Law is here to help. Our estate planning and wealth preservation experts know special needs trusts in the state of Tennessee inside and out and bring professional expertise and compassion to help you make the right choice. Reach out to us today to get started:
