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A special needs trust is a legal way to help people with disabilities without disqualifying them from government benefits. One of the main financial risks of being disabled is losing benefits because your wealth or income level exceeds the government’s very strict limits. A special needs trust may be a solution in this situation because it keeps assets and income out of the hands of disabled beneficiaries and favors the trustee who retains control of the trust property. Here’s a look at what a special needs trust is, how it works, and how it can legally address the needs of disabled beneficiaries without compromising government benefits.
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What is a special needs trust?
A special needs trust keeps assets and income out of the beneficiary’s name, allowing the beneficiary to receive benefits while remaining within government limits. The trust is administered by an independent trustee who distributes funds on behalf of the beneficiaries at appropriate times.
There are two important things to note about special needs trusts. First, assets from the trust can only be used for supplementary needs of beneficiaries not covered by government benefits. For example, if a beneficiary wants to attend college but cannot afford tuition and the government is not distributing funds for it, funds from a special needs trust may be available.
Another important thing to note about special needs trusts is that the trustee must make payments directly to the service provider. For example, if a beneficiary needs $10,000 to attend college, the trustee must pay that money directly to the institution, not the beneficiary. As soon as the distribution becomes the property of the beneficiary, the property law may be triggered and the beneficiary may not be able to receive the benefit.
What are the government limits on assets and income of disabled beneficiaries?
To be eligible for Social Security Disability Insurance (SSDI) and/or Supplemental Security Income (SSI), you must meet certain job and document requirements. But on top of that, the US government also imposes limits on income and wealth. Specifically, in 2023 he will not earn more than $1,470 a month on average, or $2,460 for the visually impaired. To be eligible for SSI benefits, as an individual he cannot have more than $2,000, or as a couple he cannot have more than $3,000. Some assets are excluded from resource determination, such as a house, a car, household items, and certain other assets. However, one of the reasons for having a special needs trust is to prevent beneficiaries from presenting too much income or assets and being disqualified.
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What types of special needs trusts are there?
Different types of special needs trusts can be created depending on your personal circumstances. However, two of the most common special needs trusts are called first party and third party. As the name suggests, a first party special needs trust keeps assets under the control of the beneficiary. For this type of trust, the beneficiary must be disabled and under the age of 65 at the time the trust is created. Also, the trust must be irrevocable. First party trusts help disabled people with large assets continue to qualify for government benefits.
A third party special needs trust includes money belonging to a person other than the beneficiary. Disability is not a requirement in a third party trust. It can also be used as a spending trust to avoid having irresponsible beneficiaries exhaust all assets.
What happens after the beneficiary dies?
The disposition of a special needs trust after the death of a beneficiary depends on the type of trust. First-party trusts typically require that state Medicaid payments received by beneficiaries be repaid before the rest of the trust is split. Third-party trusts have no such requirement and can have secondary beneficiaries, so they don’t necessarily have to distribute assets upon the death of the primary beneficiary.
Conclusion
Special needs trusts are complex vehicles in many forms. Consult an attorney who specializes in this type of law to help draft legal documents that best meet your beneficiary’s needs without disqualifying you from additional government benefits.
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This article originally appeared on GOBankingRates.com: Generational Wealth: What’s a Special Needs Trust?
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