Estate planning is always important for parents of young children. That same planning takes on a heightened importance when you are the parent (or grandparent) of a child with special needs. In fact, without proper planning, your efforts to provide for your child could actually do more harm than good. One estate planning tool that is often used to provide for a beneficiary with special needs is a special needs trust. To help you better understand your options, an Indianapolis special needs planning attorney at Frank & Kraft explains the different types of special needs trusts.
Why Traditional Estate Planning Tools May Not Be Enough
As a general rule, a child with special needs will grow up to be an adult with special needs. The law will consider your child to be an adult when he/she reaches the age of 18 without regard to your child’s functional abilities. Consequently, there is a good chance that your adult child will continue to depend – to varying degrees — on state and federal assistance programs such as Medicaid, Medicare, or SSI. Those programs, however, typically have income and asset limits that cannot be exceeded by recipients. Gifting assets to someone with a disability or special needs, therefore, can result in disqualification for many of these much-needed programs. The good news is that a special needs trust often presents a solution to this common dilemma.
What Is a Special Needs Trust?
A special needs trust, also referred to as a “supplemental” needs trust, is an irrevocable living trust that is specifically designed to protect assets intended for a beneficiary with special needs without jeopardizing the beneficiary’s eligibility for assistance programs. There are two types of special needs trusts that are commonly used, including:
- Third party special needs trust — as the name implies, a third party special needs trust is established by a third party with assets owned by the third party for the benefit of a person with a disability or with special needs. This type of trust is most often established by a parent, or other family member, for the benefit of a child with special needs. A third party special needs trust is funded using assets gifted by the parent, grandparent, or other family members. This type of trust must include specific language and must be worded such that the assets in the trust are actually distributed to a third party, such as the parent, to be used for the benefit of the individual with special needs. Because the assets held in the trust are not available to the beneficiary, those assets do not disqualify the beneficiary from eligibility for assistance programs such as Medicaid and SSI.
- First party special needs trust – also referred to as a “self-settled” trust, a first party special needs trust is established using assets of the disabled individual or person with special needs. The beneficiary of the trust must be someone with special needs or who is disabled. The trust is actually established by a parent, grandparent, guardian of the person with special needs, or by a court; however, it is funded using assets owned by the beneficiary. This type of special needs trust is most frequently needed when a disabled individual receives a lump sum of money, such as the result of a settlement for injuries in a personal injury accident. In the absence of the trust, the lump sum received by the beneficiary would likely disqualify him/her from eligibility for assistance from Medicaid, SSI, and other state and federal assistance programs. One of the other important differences between a third part and a first party special needs trust is that with a first party trust, any assets remaining in the trust upon the death of the beneficiary must be used to pay back Medicaid. With a third party special needs trust there is no need to worry about repaying Medicaid.
Contact an Indianapolis Special Needs Planning Attorney
For more information, please download our FREE estate planning worksheet. If you have additional questions about the different types of special needs trusts, or if you wish to discuss special needs planning for your estate plan, contact an experienced Indianapolis special needs planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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