Understanding special needs trusts

Who will care and provide for my children when I'm no longer here?

It's one of the most daunting questions parents of individuals with disabilities face. To plan for future care, they must navigate a myriad of complexities — from guardianship decisions, to evaluations of private and government resources, to restrictions on Medicare and Security Supplemental Income (SSI).

There is, however, a financial planning solution designed specifically to help families and caregivers of those with special needs: special needs trusts (SNTs). An SNT can provide supplemental funding to cover a variety of expenses for the individual with special needs without impacting future eligibility for government assistance. Those expenses can include medical care, travel, entertainment, pet care, and other services designed to enhance the individual's quality of life. That assistance can be particularly important in the future when parents or other primary caregivers are no longer around.

There are many benefits of having an SNT, including:

• Supplemental income and preservation of benefits. The SNT will allow you to provide future supplemental financial support for the individual with special needs without jeopardizing their eligibility for government assistance programs.
• Financial protection. Funds in the trust are not subject to claims from creditors, such as landlords, credit card companies, and other lenders.
• Control of assets. You can designate one or more trustees to oversee the SNT, including trusted professional advisors or family members. In addition, as the grantor (the person who sets up the trust), you can determine how funds should be used even after the death of the beneficiary.

There are several options for establishing trusts; the one that works for your situation depends on your financial situation and the assets that will fund the trust. These options include:

• First-party or self-settled trust. This type of trust is established with the assets of the individual with the disability. It's most commonly used to protect property he or she owned prior to the onset of the disability, or any inheritance or court-mandated settlement they received.
• Third-party special needs trust. This trust is established and funded by a party other than the beneficiary, such as the parents of the individual with the disability. With a third-party trust, you can choose an independent party to serve as trustee or co-trustee to oversee the trust.

While both trusts are designed to provide financial support and protection for the individual with special needs, they do have one very important difference regarding the control of assets upon death of the beneficiary. With a first-party or self-settled trust, the trustee of the SNT is required to use the remaining assets to reimburse any state(s) for Medicaid benefits the beneficiary received during his or her living years. With a third-party SNT, however, the grantor can assign other beneficiaries, making this type of trust optimal for protecting the primary beneficiary and preserving assets for other family members.

• ABLE account. Another more affordable option may be an ABLE account (Achieving a Better Life Experience Act of 2014). This account, which is owned by the individual with the disability, works similarly to a 529 college savings plan in that it's funded with after-tax dollars and offers other ongoing tax benefits.
• Pooled trusts. Managed by nonprofit organizations, pooled trusts combine assets from different sources and invest them. Funds from a pooled trust are used for beneficiaries based on their portion of the total pool. Pooled trusts may be ideal if you do not have sufficient funds to provide the disabled individual with the care they need now or in the future.

With the complexity of the laws involving SNTs, the ever-changing regulations surrounding welfare program eligibility, and the influx of estate and trust solutions available online, I recommend you speak with a legal advisor before setting up an SNT. With prudent planning and research, you can better understand your options and ensure you have peace of mind that your loved one will have the best quality of life in the future.

Working alongside a financial professional can help you navigate the future and reach your potential. To learn how our Wealth Advisors can help you, please call 1.877.670.5400, visit us online, or visit your nearest Citizens branch.