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What You Need to Know About Special Needs Trusts

Your loved one can get financial assistance from a special needs trust without risking losing access to public assistance. You may want to create a special needs trust if you have a loved one who will need financial support after you die. What is the operation of a special needs trust? Direct financial gifts to people with exceptional needs will likely prevent them from being eligible for government assistance. By leaving money to a special needs trust, you can raise your loved one’s standard of living without compromising their ability to receive benefits.

Benefits

A Special Needs Trust can improve the quality of life for disabled people by providing funding for products and services not otherwise available through government programs. A Special Needs Trusts is generally created by a grandparent, parent, or legal guardian on behalf of a disabled person. However, these funds are not protected from creditors in some states, and they may not be beneficial for disabled individuals who have assets.

Special Needs Trusts benefit people with permanent or temporary disabilities who can’t manage their financial affairs. These trusts are often used when a disabled person inherits property or money or receives public benefits like SSDI. They can be used for a range of other purposes.

Rules

A special needs trust, also known as a supplemental needs trust, is established to provide financial support to a disabled individual. This type of trust is separate from an individual’s estate, and its assets are not counted toward the beneficiary’s eligibility for governmental programs.

The rules of a Supplemental Needs Trust can be complicated and challenging to administer. Therefore, it is important to consult a qualified tax professional for help. A tax advisor can also help you choose how to use trust assets best. 

Funding Options

A Special Needs Trust is a type of trust that can help people with disabilities pay for expenses that don’t qualify for government benefits. For example, it can cover the costs of therapy, computer equipment, transportation to medical appointments, and even vacations. However, it must be spent carefully and by IRS guidelines. Keeping receipts and spreadsheets is highly recommended when using Special Needs Trust funds.

There are two types of Special Needs Trusts.

One is the Third-Party Special Needs Trust, funded by family members and friends of the beneficiary. This trust is designed to supplement government benefits while maintaining asset control. However, it does not cover food, shelter, or medical care expenses. The other type of Special Needs Trust is the Inter vivos Special Needs Trust, which allows contributions to be made before the grantor dies.

Tax-Deductibility

A special needs trust is an important vehicle for special needs planning. These trusts allow you to set aside funds for a special needs person while preserving their eligibility for Medicaid programs. When the special needs person passes away, the assets in the trust pass to the beneficiary’s heirs tax-free.

These funds can meet a beneficiary’s supplementary needs, such as medical care, special equipment, and utilities. They can also provide education, job training, entertainment, and more. Sometimes, the trust can even supplement a disabled recipient’s income.

A child or a third party may set up a special needs trust. Third-party trusts are commonly taxed differently than self-settled trusts. Depending on the structure, tax savings can be significant.

Sole Benefit Rule

There are specific rules that a Special Needs Trust must follow to be approved. The primary requirement is that the funds are used for the beneficiary’s sole benefit. In addition, a Special Needs Trust funded through Medicaid must also include a payback provision. This payback provision requires that funds used by the Special Needs Trust be used for the beneficiary’s needs. However, the sole benefit rule is extremely difficult to define.

One of the biggest differences between an SNT with a sole benefit rule and a standard SNT with more than one beneficiary is that an SNT with a sole benefit provision can only have one beneficiary.

In most cases, a sole benefit trust is created by a parent for an adult disabled child. The beneficiary’s parents may receive Medicaid benefits or other needs-based public benefits. Because of this, a Special Needs Trust with a sole benefit provision will not prevent the parent from receiving public benefits but will require a payback provision.

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