Is A Special Needs Trust A Good Choice?

Every parent wants to ensure that their child’s financial future is safe. But for the parents of special needs children, there are many additional hurdles to overcome. For example, it’s natural to wonder who will take care of them once you pass away, and whether their needs will be met when you’re no longer able to assist them. 

In such cases, creating a special needs trust seems like the best way forward. Yet, despite the fact it has numerous advantages, there are also special needs trust pitfalls to consider. 

Let’s take a closer look at these types of trusts to determine whether they’re a good choice for your child.

Why Special Needs Trusts Were Created

Generally, the only way for special needs people to receive health coverage was through Medicaid. Unfortunately, to be eligible for Medicaid, a person had to have a limit of $1.5k to their financial resources. 

This can be problematic, as assets over that amount have to be transferred to another person to stay within the eligibility bracket. But if that happens, the person may be subject to the so-called “look back”, meaning they could lose their coverage for this program in as little as three years after the transfer. 

Creating a special needs trust soon became a workaround for this issue because the disabled individual could transfer money to the trust and stay eligible for Medicaid or SSI. In other words, money kept within the trust always stays protected and won’t count toward the fund limit for Medicaid. 

It’s worth noting that this particular practice slightly died down when The Affordable Care Act was passed. According to this act, it’s prohibited to deny coverage to individuals suffering from pre-existing conditions. As such, Medicaid was slowly phased out as the optimal healthcare program for disabled people. 

Hence, the special needs trust is no longer necessary if your main goal is preserving your child’s healthcare coverage.

Special Needs Trust Advantages

Considering they’re no longer necessary and taking into account all the special needs trust pitfalls (which we’ll go over in a minute), it might seem like special needs trusts are practically useless.

On the contrary - these trusts are still a great choice for people who are unable to manage their finances independently. 

Here are the main advantages of these types of trusts (apart from preserving Medicaid and SSI benefits):

• Funds used in creating a special needs trust are tax-deductible.
• Makes sure that all the funds contained in the trust are strictly used to pay for the care of a disabled individual. This can be comforting if your main concern is that your child will be taken advantage of in financial situations.
• Funds in the trust are protected from creditors and are not available for paying judgments.

Special needs trust pitfalls

Although useful in some cases, there are plenty of problems with these trusts, including:

Limited Independence

One of the biggest special needs trust pitfalls is the fact that the beneficiary can only access the funds upon the approval of the trustee. Furthermore, the trustee has the right to ascertain whether the request is acceptable. As such, the disabled individual doesn’t have much control over their financial situation, which severely restricts their independence.

Excessive Costs

Setting up a special needs trust can be expensive and a similar thing applies to annual management costs. In addition, there are minimum amounts necessary to set up this trust.

Medicaid Payback Costs

Some funds in the trust must be used exclusively to pay back Medicaid. The amount always has to be equal to the one Medicaid spent on the disabled individual’s behalf. Sadly, this also means that the trust will be completely void once it ends through legal termination or the person’s death. 

How To Choose A Trustee Of A Special Needs Trust

If you’ve closely evaluated these special needs trust pitfalls and are still certain that you want to start it, you should consider who to appoint as a trustee.

The role of the trustee is to provide money from the trust only when the beneficiary wants to use it for services outlined in the trust’s terms.

Since the trustee has a great deal of power, you need to choose an individual who is familiar both with the needs of the person and the legal side of things. They also need to have a good grasp of the financial aspects, including budgeting and accounting. 

Because of the extensive range of responsibilities, many families choose to hire a professional trustee to handle the trust. Still, if you want an additional layer of protection, you can assign a family member as a co-trustee. This may cause problems unless you lay out the terms of the relationship between the trustees in the trust documentation. 

The family member you assign as a co-trustee should be someone who will work in your child’s best interest and is deeply familiar with their needs. As the beneficiary ages, their needs will change and the trustees should know the progression of the condition, as well as future needs.

Should You Hire An Attorney?

You don’t want to risk making mistakes. There are heaps of state and federal laws at play in creating and use of special needs trusts, so you should always consult an attorney if you want to see to it that the trust you’re creating is valid. 

Also, an attorney can customize the trust to better address the evolving needs of your child as they age. More importantly, they’ll use the right kind of language to ensure that the trust is valid in the eyes of the law.

Protect Your Child’s Future With Doane & Doane

Making plans for your child’s future is one of the most difficult decisions you’ll ever make. Yet, if you approach it the right way, you’ll have the peace of mind that your child stays safe, even when you’re no longer around. 

Since there are various special needs trust pitfalls to consider, consult an attorney before making a definitive choice. Legal professionals working at Doane & Doane can assist you in setting up an alternative form of state planning, consisting of multiple trusts that may work better than a special needs trust in your situation.

Why choose us?

We have an impeccable reputation built diligently for over two decades - a fact that can be confirmed by droves of happy Palm Beach County clients. We believe your child deserves the best legal services possible, and that’s something we can deliver regardless of the circumstances. 

Set up the groundwork for your child’s financial safety now by calling 561-656-0200 or filling out our contact form.

Note: 

The information in this blog post is for reference only and not legal advice. As such, you should not make legal decisions based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.