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Persons with special needs or disabilities often require additional care and financial support, but public benefits and insurance have strict eligibility requirements and often don’t cover all of their costs. That’s why supplemental or special needs trusts exist — they help provide an extra layer of financial security for individuals with disabilities, allowing them to enjoy a better quality of life.
At Colorado Estate Matters, Ltd., we help our clients find invaluable peace of mind with our special needs trust services. When you choose us, you can rest assured that we’ll take the time to understand your unique situation and create a trust tailored to meet your specific needs and wishes.
Call (303) 713-9147 to schedule a free consultation with an experienced Denver special needs trust lawyer today.
To understand what a special needs trust is, it helps to first understand the concept of trusts. A trust is an agreement between two or more parties where one party (the trustee) holds and manages assets for the benefit of another party (the beneficiary). The trust maintains legal ownership of the assets, but the beneficiary is entitled to use the assets according to the terms of the trust.
A special needs trust is a trust that’s specifically designed to benefit individuals with disabilities, allowing them to access additional financial resources without losing eligibility for government benefits such as Medicaid and Supplemental Security Income (SSI). Although these are often created by the beneficiary’s family members, they can also be created by the individual as a form of long-term financial planning.
The trustees are responsible for managing the assets in a manner to benefit the beneficiary, but they must also ensure that the beneficiary’s eligibility for public benefits won’t be affected. The trustees have the discretion to make decisions about how the trust’s assets should be used, but they’re required to act in the beneficiary’s best interests at all times.
The most substantial benefit of a special needs trust is its ability to provide financial security and stability for impaired persons without compromising their eligibility for government benefits. When assets are placed in a trust, they’re owned by the trust, not the individual benefiting from them. Although the beneficiary may have indirect access to the trust’s funds and assets, that access is restricted by the trustee, therefore the assets aren’t “available” to the beneficiary.
By transferring assets into a special needs trust, the income and asset limits imposed by programs like Medicaid, SSI, subsidized housing, and vocational rehabilitation can be bypassed while still allowing the beneficiary to access the resources of the trust for their benefit.
Parents, guardians, and other loved ones of a disabled person can use a special needs trust to provide for their immediate and long-term financial needs. It also provides grandparents, aunts, uncles, and other close relatives an avenue to pass on assets to a loved one with a disability without causing financial hardship for the beneficiary.
For adults with disabilities who have the capacity to create a trust for themselves, these trusts offer the opportunity to qualify for public benefits while still being able to enjoy the fruits of their hard work and planning.
Special needs trusts should supplement, not replace, public benefits. The funds in the trust can be used to cover expenses that often aren’t covered by government programs such as:
Keep in mind that the trustee cannot make cash payments directly to the beneficiary. Instead, the funds must be used by the trustee to purchase the above-listed goods and services for the beneficiary’s benefit.
The funds in a special needs trust cannot be used to pay for food, shelter (including mortgage, rent payments, or property taxes), utilities, or most other basic living expenses. If the beneficiary is actively receiving public benefits, they might usually only pay for these expenses using the funds provided by the government.
Special needs trusts come in a variety of different forms depending on the beneficiary’s situation. When you begin working with our estate attorney in Denver, we’ll help you determine which type of trust best suits your needs.
A first-party special needs trust is funded with the beneficiary’s own assets. This type of trust is often used when a person with a disability has savings, receives an inheritance, or is awarded compensation for a personal injury.
A third-party special needs trust is funded with assets that belong to someone other than the beneficiary such as a parent or grandparent. This type of trust is often established to financially provide for an individual with a disability after the death of the person who established the trust.
When the beneficiary dies, funds remaining in the trust can pass to another family member or to charity, instead of being used to reimburse the government. These trusts may be included in a will or be established as part of a living trust to avoid probate, or created as a stand-alone trust.
Stand-alone special needs trusts are established by someone other than the beneficiary but don’t depend on the trust creator’s death. These trusts are separate documents that immediately go into effect and are often used to provide for the long-term care of a person with a disability during their lifetime.
Multiple people can contribute to a stand-alone trust, making it easier to ensure that the beneficiary’s needs are taken care of. Stand-alone special needs trusts can also be listed as a beneficiary on retirement accounts and life insurance policies, making it easier to pass them on without going through probate.
A testamentary special needs trust is established as part of a will and goes into effect only after the death of the person who created the trust, often the beneficiary’s parent.
The will may state that the special needs trust will be created for the child upon the parent’s death using a specified portion of the parent’s estate. This means that a testamentary trust doesn’t exist until the death of the parent and can’t be utilized until then.
Testamentary special needs trusts are often used when a person with a disability is receiving public benefits and the trust creator wants to pass down an inheritance without affecting those benefits.
A pooled trust is managed by a nonprofit organization and provides the same benefits as other types of special needs trusts. The account can be established by the beneficiary, a loved one, or a court.
This type of trust can benefit multiple people with disabilities by creating a separate account for each beneficiary with a professional trustee managing the funds. Beneficiaries’ assets and investment returns are pooled and shared among the beneficiaries, but each beneficiary’s account remains distinct, so they will still receive their share of the trust’s funds.
Third-party pooled trusts are created and funded by anyone other than the beneficiary, such as a parent or grandparent. Any assets placed in the trust shouldn’t have been owned by the beneficiary before being placed in the trust.
When the beneficiary has assets of their own that they want to put into the trust, they can opt for a first-party pooled trust. Anyone can establish a first-party pooled trust for the benefit of someone else such as for a child or grandchild.
The reason for the distinction between first- and third-party pooled trusts is that when the beneficiary of a first-party pooled trust passes away, any remaining funds in the trust are used to reimburse the government.
Each type of special needs trust is set up differently, but there are a few general steps that apply to all of them. For starters, you should consult with an attorney who has experience helping clients establish these trusts because they are very complicated and they can help you determine which type of trust is best for their situation.
Before your consultation, it’s helpful to brainstorm the specifics of your trust such as the amount of money or the particular assets you want to place in it and how you want them to be used or managed. Going into the process with a general idea of how you want to use the funds can help you and your attorney work more efficiently.
You’ll also need to select an appropriate trustee. The trustee is responsible for managing the trust and should be someone you can rely on to act in the beneficiary’s best interests. This can be a family member, a professional trustee, or a combination of the two. Your attorney can help you decide which option is best.
After you have a plan in place and the documents are drafted, the trust must be signed and funded. Depending on the type of trust you choose, this could be done through the transfer of assets or the signing of a will.
From there, the trust should be managed according to your wishes, and the trustee should update you regularly on the status of the funds. Your attorney can help you set up a plan for regular reviews to ensure the trust is being managed properly and that the beneficiary’s needs are being met.
It’s important to be aware that special needs trusts could be subject to certain taxes such as income, gift, and estate taxes. In some cases the trustee may also charge fees for managing the trust; these fees should be outlined in the trust agreement.
While there’s no getting out of taxes and fees completely, a properly drafted trust can reduce the burden that comes with them. Your attorney can help you better understand the taxes and fees associated with your particular trust, as well as how to minimize them.
Establishing a special needs trust is a major decision that requires careful consideration and planning. Whether you’re looking to provide for a loved one with special needs or want to protect your assets for your benefit, a special needs trust might be the key to achieving your goals.
With Colorado Estate Matters in your corner, you can rest assured that your trust will be set up in accordance with the law and your wishes.
Contact us today at (303) 713-9147 to learn more about how we can help you protect what matters most. We offer free consultations and can answer your questions about special needs trusts and other estate planning options.