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Special Needs Trusts: Not Just for Disabled Children

| May 15, 2019
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If you have a son or daughter who is unable to care for themselves, especially one with a disability, a special needs trust can help provide for them after you’re gone and protect their inheritance. A special needs trust can be used for any adult child who is unable to care for themselves—any child who is not self-sufficient.  

A special needs trust will also help disabled children maintain their eligibility for government financial aid, such as supplemental social security (SSI). 

Establishing a special needs trust is not complicated and is relatively inexpensive, while the alternative—leaving an inheritance outside of trust—can lead to several complications. 

Related Video: When Special Care Is Needed

Who Can Use a Special Needs Trust?

Special needs trusts, also called disabled person trusts, were originally developed to help disabled people receive the care they need after their parents are gone. These trusts can also provide for any adult child who is unable to mentally or physically care for themselves.

A special needs trust can protect an inheritance if your adult child is terminally ill, mentally ill, dealing with a chronic health condition, battling drug or alcohol addiction, a chronic gambler, or facing any other barrier to self-sufficiency. When the money is held in trust, there is no need to worry that it would be lost or handled incorrectly.

A special needs trust can go into effect at any time in your adult child's life, through their  65th  birthday. The trust will last for the remainder of their life or until the trust is depleted. 

Protecting Government Aid 

If your disabled child receives government support in the form of supplemental security income (SSI) or Medicaid, a special needs trust allows you to  pass on assets without  triggering disqualification. Since the money does not go directly to the  individual but to the trust, their eligibility for government programs is not restricted.  Alternatively, a financial gift or inheritance given outside of trust could raise their income above the acceptable limits for those programs.

There are some important restrictions around how money set aside in trust can be spent. Funds cannot be given directly to your loved one, as this would increase their income levels and affect their eligibility for government programs. Money in trust cannot pay for food or housing costs—these expenses should be covered with SSI income or with  wages, if available.  Typically, a trustee will use the trust income to pay for expenses such as:

  • Personal care attendants
  • Education
  • Medical and dental expenses
  • Rehabilitation services
  • Entertainment and recreation
  • Cars
  • Home furnishings
  • Travel

While the trustee can give your child money directly, it will count as income, and any gifted money must stay within the established monthly limits for continued government qualification. 

It’s recommended you set aside enough money to cover expenses for the remainder of your child’s life. This is where a CERTIFIED FINANCIAL PLANNERTM can shed light on the issue with personalized recommendations that take your adult child's needs and circumstances into account.

Pitfalls of Passing on Money Without a Special Needs Trust for Adult Children 

We’ve touched on the complications that trigger when you leave an inheritance to a special needs child outside of trust. Here’s further info:

1. Loss of Medicaid and SSI Eligibility 

As mentioned above, if your child is receiving government benefits and you gift them a cash gift directly, they may lose their eligibility. Medicaid has an income cap of $2,313 per month, and SSI has an income cap of $2,000 per month. Anyone with income above this amount may have their benefits lowered or completely cut. 

For a direct cash inheritance, your child would need to spend any assets you left until their income is low enough to qualify for government benefits. Medicaid and SSI both use a look-back period to determine eligibility, so your child may not qualify for benefits for up to five years after the date of the gift, even once they sufficiently reduce their income.

If you aim to provide your adult child with money that will take care of their needs for the rest of their life while also retaining government assistance, a cash gift won’t work.

2. Increased Potential for Financial Abuse or Mismanagement

Financial abuse is common among disadvantaged adults, but this can be more closely controlled when your  adult  child's assets are held in trust. As long as the trustee is someone you trust to act in your child's best interests, the money left in trust will be used for its intended purposes and your child cannot be influenced or coerced out of money. You retain  peace of mind that the money will go toward caring for your child for the rest of their life.

In contrast, if you create a bank account for your adult child, an unscrupulous person could manipulate them into giving away money. A person with income of only $2,000 per month becomes less attractive to aspiring abusers. 

An adult child with gambling compulsions or drug addiction could also abuse a cash inheritance or waste it to feed their addictions. If you know your adult child cannot handle their own money, a trust is best.

3. Available to Creditors or for Judgments

If money is not held in  trust  but given to your adult child, it is available to creditors. While rare, there is a chance he or she could fall behind on bills, mortgage payments, taxes, or other expenses and have their assets seized to pay creditors. 

Money not held in trust could also be used for legal judgments if your adult child faced a lawsuit. A trust is the best way to ensure your assets  are  used to provide their ongoing care.

How to Set Up a Special Needs Trust in California 

A special needs trust can be funded at any amount—there is no minimum to get started. However, setup  and maintenance fees are high, so we recommended you set aside at least $100,000. The trust can be funded with your own assets, payouts from life insurance policies, inheritances, or a combination of sources. 

People with disabilities, mental health issues, or physical ailments have many different needs. Some need greater levels of care, while others can perform many functions for themselves and need help only with certain activities. For this reason, these trusts are highly individualized. 

To get started, consult your financial team. Your financial advisor will help map out the best funding level and timing for your child’s long-term care and for your tax picture. Your attorney will help ensure the trust is tailored to the unique needs of your child.

Third, you must name a trustee. Choose someone that you trust will act in the best interests of your child for the rest of their life. The trustee will act as the trust administrator, and they retain the sole ability to authorize expenses and disperse money from the trust, so it is vital that you choose someone you trust—someone who can care for your adult child as you would. If you don’t know a viable trustee, you can hire a professional trustee who oversees trusts for other families. Your lawyer or financial advisor can recommend a professional trustee.

After the trust is set up, it must be managed. There are tax issues to consider, and many trustees do not have the financial expertise to handle them.  This is where financial advisors come in. We can provide guidance on trust administration, taxes, and management to truly deliver the best for your adult child.

Related Article: Tips for Finding Care for Your Special-Needs Child

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Categories: Estate Planning, Special Needs Trust, Supplementary Security Income, Inheritance 


This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

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