If you have family members with special support needs, you may face mental and physical challenges, but you may also worry about maximizing the financial support your loved ones need. . Therefore, we encourage you to consider setting up a special needs trust.
This type of trust helps maintain the financial security and lifestyle of individuals with special needs. In addition, special needs trusts allow trust beneficiaries to receive financial assistance for supplemental needs without forfeiting public benefits such as Supplemental Security Income (SSI) and Medicaid.
Here’s how it works: As a trust grantor, you establish the trust and appoint a trustee responsible for administering the trust. Funding for the trust may be gifted throughout life or may come from other sources such as inheritance or judicial settlements. But another popular financing mechanism is life insurance, which allows a trust to purchase the life of one or both parents of a child with special needs. And so long as the trust is also designated as a policy beneficiary, government interests are protected.
The role of the trustee is important in a special needs trust. The trustee must control the funds in the trust and ensure that those funds are used only to supplement her SSI and Medicaid, government programs normally used to pay for food, housing, and medicines. . Alternatively, a special needs trust can be used for most other expenses, such as transportation and travel expenses, education, entertainment, professional services, and personal items.
You can be your own trustee, or you can choose a relative or trusted friend. Ideally, you want someone who has a good understanding of your wishes and needs of your family member with a disability, and who is competent in financial management and keeping her SSI and Medicaid regulations up to date.
Alternatively, you can hire a professional trust company to manage your special needs trust. This type of company has expertise in asset management and government regulation and provides strict recordkeeping of all financial transactions related to the trust. If you go this route, you should compare the costs and services of different trust companies. For personal matters, such as administering a trust for a family member with special needs, you need to make sure you are happy with whichever company you choose.
You should also understand any areas that may be of concern regarding your special needs trust. First, the trustee has complete control over how and when the funds are distributed, so beneficiaries can get frustrated when their requests for money are denied. Additionally, a third-party special-needs trust is funded by someone other than the beneficiary, while a first-party special-needs trust is funded by the beneficiary’s own assets. For these first-party special-needs trusts, the trust typically must repay Medicaid. Money spent on behalf of a beneficiary after the beneficiary’s death. This repayment could dry up the trust and deprive the secondary beneficiaries of the assets they would otherwise receive. Third-party special needs trusts do not require Medicaid repayments.
Before setting up a special needs trust, consult legal counsel to ensure that this arrangement is appropriate for your family’s circumstances. But if it’s managed properly, it can alleviate some of the stress you might feel about the future of a loved one with special needs.
Eric Milhoua is Westerly’s financial advisor to Edward Jones. Please call 401-596-6100.