Special Needs Trust: What Is It and What Are the Benefits?

What is a special needs trust?

In order to understand special needs trusts, we need to first understand what trusts are. We have written about trusts and other estate planning tools before. In short, a trust is a legal instrument, which allows the trust creator or grantor to place funds and assets to be managed and distributed by a trustee (a person or entity) for the benefit of a beneficiary.

A Special Needs Trust, or a Supplemental Needs Trust as it is sometimes called, is a legal instrument intended to provide benefits for individuals with physical disability or mental illness. The creator of the trust can be the parents, grandparents or guardians of the disabled person.

The purpose of a special needs trust is to ensure that the disabled individual has a steady flow of income in order to live a happy and fulfilling life. Moreover, under the Omnibus Budget and Reconciliation Act of 1993 (OBRA-93), any funds or assets placed in a special needs trust are not counted against the disabled individual when it comes to assessing eligibility for government benefit programs. Simply put, a special needs trust allows the disabled individual to receive government benefits along with income flow from the trust to fill in the gaps. This is a far more beneficial tool than simply giving money to the disabled individual or leaving an inheritance. In those situations, the gifted or bequeathed assets may be counted when it comes to assessing the disabled individual’s eligibility for government benefit programs such as Supplemental Security Income (SSI) or Medicaid.

Who can benefit from a special needs trust?

Special needs trusts are intended to benefit a disabled adult or child. A disabled adult, as defined by the Social Security administration, is an individual age 18 or older who is blind or who has a medically determinable physical or mental impairment that prevents him or her from participating in any substantially gainful activity. This physical or mental impairment must have lasted or be expected to last for at least 12 months or more. A disabled child is an individual under age of 18 who is blind or who has a medically determinable physical or mental impairment that causes severe functional limitations. Similar to the situation with disabled adult, in case of a disabled child the physical or mental impairment must have lasted or be expected to last for at least 12 months or more.

What are the benefits of a special needs trust?

Source of financial support beyond government programs

Special needs trusts can be used to provide supplemental and extra care beyond what the government provides. Special needs trusts are intended to work on a sliding scale. For example, if available government benefit programs only provide for 20% of the disabled individual’s needs, the trust will provide the remaining 80%.

Continued eligibility for government benefit programs

Although other forms of trusts such as family trusts can be set-up to provide for loved ones, none is specifically designed or intended to protect disabled individuals’ interests. This is mainly due to the fact that special needs trusts allow the grantors to put funds and assets in the trust while still allowing the disabled individual to be qualified for government programs. This is because, under OBRA-93, the funds and assets that are properly placed in a special needs trust do not count as income for the disabled individual when it comes to evaluating their eligibility for government benefit programs such as SSI and Medicaid.

Protection against creditors

The funds and assets placed in a special needs trust are not subject to creditors or seizure. Therefore, the assets of disabled individuals being sued are not subject to a judgment as long as they are properly placed in the trust.

Why you should hire an attorney to create a special needs trust?

There are a number of specific and complex government requirements regarding special needs trusts and poorly drafted ones can easily be invalidated and set aside. This could cause loss of benefits, savings, or other financial and legal hardship for the disabled individual. In some situations, it could even lead to civil litigation or criminal proceedings. Thus, it is imperative that families choose an attorney who is familiar with special needs trusts and the governing laws and regulations. Some of the complex regulations and specifications that are required for the creation of special needs trusts are listed below.

  • A special needs trust can be created at any time before the disabled beneficiary’s 65th birthday.

  • Under OBRA-93, a special needs trust can be created by parents, grandparents or guardians of the disabled individual. However, since the law does not define who the term “guardian” refers to (for example a court-appointed guardian or a guardian-in-fact such as a concerned family member or friend), a properly drafted trust can allow for siblings, family members or friends to create the special needs trust.

  • A special needs trust should contain certain language showing the intent to provide supplemental and extra care beyond that which the government provides. It must show that the intent is more than just providing basic support.

  • Under OBRA-93, a special needs trust must be irrevocable. Further, it must comply with the requirements for including provisions regarding trust termination or dissolution and include explicit directions for the trust amending process.

  • A special needs trust must also make specific references to the Social Security Operations Manual, including but not limited to providing for payback to Medicaid in certain situations, such as fraud.

If you are interested in creating a special needs trust for a loved one and would like to have your case evaluated, call 1-844-HOLBORN or email us and one of our estate planning attorneys will be happy to assist you.

Disclaimer: This post is meant for general informational purposes only, and it is not to be construed as legal advice. As with any laws, the information in this blog post may change at any time and may apply differently in different jurisdictions. The post may constitute Attorney Advertising as defined by the rules of professional responsibility of some jurisdictions. Holborn Law is based in Orange County and Riverside. The attorneys of Holborn Law APC are active members of the State Bar of California and licensed to practice law in California. All services relating to immigration and naturalization provided by Holborn Law APC are provided by active members of the State Bar of California or by a person under the supervision of an active member of the State Bar of California. 

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