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Creating a special needs trust allows for the distribution of funds to benefit your loved one without jeopardizing their eligibility for important government benefits such as Supplemental Security Income (SSI), Medicaid, state-based, asset sensitive medical and social programs, and housing assistance, to name a few. The process of creating a special needs trust involves several key steps. In this blog post, we will guide you through the process of creating a special needs trust.

What is a Special Needs Trust?

A special needs trust is a legal document designed to help individuals with disabilities maintain their eligibility for government assistance programs while still receiving financial support from their loved ones.

Special needs trusts are an essential tool for individuals with disabilities. These trusts can help ensure that they can receive financial support without affecting their eligibility for critical government assistance programs. There are two primary types of special needs trusts – first-party trusts and third-party trusts.

First-Party Special Needs Trusts

A first-party special needs trust is used when an individual with a disability has funds or assets of their own and wishes to preserve their eligibility for government assistance programs. In this case, the trust is funded using the beneficiary’s own assets, such as an inheritance, a legal settlement, or proceeds from a personal injury case. This type of trust is also known as a “self-settled” or “d(4)(A)” trust, referring to the specific provision of the federal law that allows for it.

One significant benefit of a first-party special needs trust is that it can help avoid the possibility of losing eligibility for federal and state government benefits such as Supplemental Security Income (SSI) or Medicaid. When assets are owned by the beneficiary, the assets can be counted against their eligibility for these programs. However, when assets are held in a first-party special needs trust, they are owned by the trust, not the beneficiary, and thus are not counted when determining program eligibility.

Another advantage of a first-party trust is that it allows the beneficiary to enjoy the benefits of professional investment management. The beneficiary can benefit from having access to the assets, subject to certain requirements and limitations. The trust funds may be used to cover some expenses beyond those typically covered by government programs, including things like entertainment, vacations, or special equipment. However, the remaining assets will be used to repay Medicaid after the individual’s death.

Third-Party Special Needs Trusts

A third-party special needs trust is funded by someone other than the individual with special needs, typically a family member or friend. This type of trust is ideal when the beneficiary with a disability has a friend or family member that wants to leave funds for their benefit. The third-party trust holds the funds and uses them to provide for the beneficiary with a disability without impacting their eligibility for government benefits. These trusts can be used to provide for the ongoing financial care and support of the individual with special needs and can be established during the lifetime of the family member or friend. Third-party special needs trusts can also go into effect after the passing of the donor family member or friend, if stated in the trust document.

Unlike first-party special needs trusts, third-party trusts do not have the requirement to reimburse Medicaid expenses. Assets in a third-party special needs trust do not come from the beneficiary and thus are not subject to the same restrictions.

Both first-party special needs trusts and third-party special needs trusts are powerful tools for families with special needs loved ones. The key difference between the two types of trusts lies in who funds the trust. By creating a special needs trust, families can ensure that their loved one receives the financial support they need while still preserving eligibility for essential government benefits.

Steps to Creating a Special Needs Trust

Creating a special needs trust can be a complicated legal process, and it is important to engage an experienced estate planning attorney. Estate planning attorneys have the knowledge and expertise necessary to advise you on what is best for your individual circumstances and ensure that the special needs trust is established in accordance with federal and state laws.

In drafting the special needs trust, the attorney will assess the unique needs and circumstances of the individual with the disability. This includes understanding the individual’s current and future medical expenses, housing needs, educational expenses, and transportation needs. The attorney will need to have a thorough understanding of the individual’s disability and how it impacts their daily living.

Selecting the right trustee is crucial for the success of your special needs trust. The trustee is responsible for managing the trust assets and ensuring that they are used to provide for the individual’s needs without jeopardizing their eligibility for government assistance programs. In selecting the trustee, it is important to consider their knowledge, experience, and ethical standards. The trustee can be a family member, friend, or professional fiduciary, like Members Trust Company.

Once the individual’s needs have been assessed and a trustee is selected, the attorney will draft the trust document to ensure that it meets all the legal requirements. For example, the trust document must detail the trustee’s responsibilities, and outline how trust assets should be used. Your attorney will work closely with you to ensure that all the necessary provisions are included in the document and that it is legally binding.

Your estate planning attorney or professional trustee can advise you on how to fund the trust and transfer the assets correctly. For instance, if you plan to fund the trust with real estate or other valuable assets, you may need to transfer ownership in a way that minimizes tax implications and avoids legal complications.

When to Update Your Special Needs Trust

Creating a special needs trust is only the first step to ensuring that your loved one with a disability is financially protected. As circumstances change over time, it is important to review the trust periodically and make necessary updates. A variety of life events can trigger a need to update your special needs trust, such as changes in the beneficiary’s health status, living, or financial situation.

For example, if the beneficiary has a significant improvement in their health condition and no longer requires as much financial support, it may be appropriate to adjust the trust to reflect this change. On the other hand, if the beneficiary’s health deteriorates and they require more support, the trust may need updating to ensure that their needs are met. Additionally, if the beneficiary’s living situation changes, such as moving to a new state, the trust may need to be amended to comply with the new state’s laws and regulations.

An additional reason to review and update your special needs trust is changes in government benefits and programs. Government regulations and eligibility criteria for SSI and Medicaid are subject to change at any time, and it is crucial to ensure that your trust remains in compliance with these regulations. Failure to update your trust could result in loss of benefits or other legal complications.

Significant financial changes in the beneficiary’s life, such as an inheritance or a legal settlement, may require updating the trust to ensure continued eligibility for government benefits. Furthermore, there may be changes in the beneficiary’s family or financial situation that require an update to the trust. For instance, if a close family member dies or if the beneficiary inherits a large sum of money, the trust may need to be modified to reflect these changes in circumstances. A special needs trust can be a powerful tool for protecting the financial future of a loved one with a disability, and it is important to keep it current and relevant to their evolving needs. By regularly reviewing and updating your special needs trust, you can ensure that your loved one is protected and provided for in the best way possible.

Create a Special Needs Trust with Members Trust Company

Members Trust Company is here to guide you through the process of creating a special needs trust that will provide for your loved one’s needs without interfering with their eligibility for governmental assistance.

At Members Trust Company, we work closely with our clients to provide timely, personalized, and effective solutions. By choosing to establish a First or Third-Party Special Needs Trust, you can ensure that your loved one has access to the financial support they need while preserving their benefits from a wide range of federal and state benefits such as Supplemental Security Income (SSI) and Medicaid. Our experienced team of professionals will work closely with you to understand your unique needs and goals, collaborating with your attorney to be sure the trust can be administered for your specific needs.

Creating a special needs trust is a step towards peace of mind and financial security for your loved one. For more information about special needs trusts, contact us.

Non-deposit investment products available through Members Trust Company are not deposits of or guaranteed by the trust company, a credit union or credit union affiliate, are not insured or guaranteed by the NCUA, FDIC or any other governmental agency and are subject to investment risks including possible loss of the principal amount invested. Members Trust Company, owned and managed by America’s credit unions, is a special purpose federal thrift regulated by the Office of the Comptroller of the Currency. Past performance is not indicative of future results. This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant. Any opinions expressed are those of the presenter and do not necessarily reflect the position of Members Trust Company. The information above is obtained or compiled from sources we believe to be reliable. We Do Not Guarantee that such information, will be free from errors, omissions, whether human or mechanical, nor do we guarantee their timeliness, accuracy, or completeness.