When you hear the term “trust fund,” you may think of the super-wealthy. But, trusts funds are not only for rich people. Instead, trust funds ensure your assets are passed down as you wish. Think of them as asset protection. So anyone with assets they want to give to their children, a charity, or someone else can use one. While there are several different types of trust funds, this article will discuss the special needs trust.
If you want to establish a trust for someone in your family, keep reading to see if the special needs trust is for you.
All About Trust Funds
A trust is an estate planning tool. It establishes a legal entity to hold property or assets for a beneficiary. A trustee, who is a neutral third party, manages the assets.
The trustee manages the assets until the beneficiary can receive them. For example, this could be when the beneficiary reaches a certain age or when the asset owner passes away.
Aside from money, you can hold assets like real property, such as jewelry and family heirlooms, and real estate. Yet, you can also have bonds, stocks, and even businesses in a trust fund account.
Special Needs Trust
A special needs trust is a legal arrangement that allows a person with a disability to receive income or have assets to cover certain expenses without limiting their eligibility for public assistance benefits. It includes people with a physical or mental disability as well as those who are chronically ill.
Public assistance benefits not affected include Supplemental Security Income and Medicaid.
A special needs trust is also a fiduciary relationship. A trustee acts on behalf of the person with a disability to manage the assets. This means you don’t have to worry about not being able to care for your loved one. Instead, a financial professional will manage the assets, even after you’re gone.
Your loved ones can continue to receive the care you always provided for them without losing their benefits with a special needs trust. In addition, the trust is irrevocable, so creditors or a winner of a lawsuit can never seize the assets.
There are two types of special needs trust. The main difference between these types of trusts is the source of funds. Let’s learn more.
Sometimes called a self-settled trust, a first-party trust uses funds owned by the person with a disability. But, the person who establishes the trust doesn’t have to be the person with a disability. For example, a parent, guardian, grandparent, or even the Court can establish a first-party trust.
However, if the beneficiary is over age 65, you cannot establish a first-party trust. The person must also meet specific government requirements to have this type of trust.
First-party trusts aren’t as common. However, families or people with a disability often use them when the beneficiary sustains disabilities later in life.
They put assets into the trust that already belong to the person with a disability. This way, the person can qualify for public benefits that have an income or asset limitation.
Personal injury awards are a typical source of income to fund first-party trusts. But, you may also fund them with a retirement plan, divorce settlement, life insurance proceeds, or inheritance.
First-party trusts are not flexible when it comes to tax planning. And, the beneficiary can only use the fund for supplemental expenses not covered by government programs.
Additionally, after the person with a disability dies, the funds in a first-party trust must be used to pay back the government for benefits received.
Those planning in advance for a loved one with special needs establish a third-party special needs trust. Usually, parents create this type of trust for a child with disabilities or special needs. However, a grandparent, sibling, or another person can establish the trust too.
There is no age limit on when you can establish this type of trust.
Third-party trusts are the most common type of special needs trust. The objective is for the special needs beneficiary to have access to financial resources for the entirety of their life.
The assets in this trust belong to a third party. They are in the trust to benefit the person with a disability. When using this trust, the third party receives the funds to pay for goods and services.
This is so that the beneficiary doesn’t lose access to their public assistance benefits. Therefore, the assets in the trust are never available to the beneficiary. And the beneficiary cannot make any spending decisions.
Using a third-party trust, your lawyer has flexibility in how to structure the trust. They will help you establish a trustee. Also, they will help identify the person to receive the remaining assets once the person with a disability passes.
A key difference is that no one will need to repay the state using the funds for previously received benefits from a third-party trust.
A lesser-known type of special needs trust is a pooled trust. A non-profit association establishes a pooled trust for the benefit of multiple beneficiaries.
There is a separate account for each beneficiary. But, the administrator pools the assets of all the funds together for investment and management.
You can establish both first-party and third-party special needs trust using a pooled trust.
Set Up a Trust Today
Establishing a special needs trust is a sure way to guarantee your loved one can still receive their public assistance benefits along with expert care. The assets in the trust will continue to provide access to excellent healthcare and be there until the end of their life.
If you’re ready to set up a special needs trust, contact us at Smith Barid. Our legal experts can guide you through the process and ensure your loved one receives the benefits they need to live a fulfilling life.