Proper beneficiary planning is an important first part of special needs financial planning and key to maintaining eligibility to valuable government benefits. Due to asset and income-based guidelines, leaving as little as $2,000 to your child could affect eligibility for Supplemental Security Income (SSI), Medicaid, and other means-tested benefits. Consulting a specially trained financial advisor1 for guidance in planning a lifetime of care can be beneficial.
Three types of trusts
Special Needs Trusts (SNTs) are important tools to help caregivers and people with special needs prepare a lifetime plan. SNTs can be named as beneficiaries without impact to means-tested government benefits. These trusts can take several forms, but three primary designs—determined by the ownership of the assets to be placed in the trust--are outlined below.
- A first party trust is used when the beneficiary’s own assets are used to fund the trust, such as an inheritance or an accident settlement, while not compromising access to important government benefits like SSI. Upon the death of the trust’s beneficiary, any assets remaining will be used to pay back the government for Medicaid coverage. Any remaining assets after the Medicaid payback can go to a designated remainder beneficiary.
- A third party trust is funded with assets from someone other than the beneficiary, such as parents or family members who want to assist a person with special needs or a disability. Like a first party trust, assets in a third party trust do not affect an SSI beneficiary’s access to benefits. However, third party trusts do not include a payback provision for Medicaid coverage received, so remaining assets can be passed to other family members or a charity upon the death of the beneficiary.
- A pooled trust is established when a first or third party trust is not a cost-effective option, if a trustee cannot be found, or for several other factors. This type of trust is established and administered by a non-profit organization that acts as the trustee, and allows beneficiaries to pool their resources for investment purposes, while still maintaining separate accounts for each beneficiary’s needs. A Medicaid payback provision exits with a pooled trust option upon the death of the beneficiary, but a portion of the remaining assets goes to the nonprofit managing the trust or, in some cases, to a named beneficiary.
Special needs trusts are legal documents that should be prepared by an experienced special needs attorney as part of an overall financial plan that will fully benefit your loved one.
Funding a Special Needs Trust (SNT)
A variety of assets or combination of assets can be used to fund your SNT. Life insurance proceeds, stocks, bonds and mutal funds are examples of assets that can be used, providing the special needs trust is named as the beneficiary. Also, monetary gifts such as birthday and graduation gifts can go into the trust.
Little things can make a big difference
Creating a third party SNT for the benefit of your child can help ensure continued access to financial resources without jeopardizing eligibility for government benefits. It is important to include specific language in the SNT, such as legal guidance on how the funds should be used to enrich your child’s life.
Protecting the future
SNT funds cannot give cash to your loved one without possible risk to government benefits; however, funds can be used for such things as recreation, vacations, home furnishings, vehicles, education and more. Although the SNT can be used for a variety of purposes, the funds shouldn’t be used for items covered by public assistance, such as2:
- Food, groceries and restaurant meals
- Rent, mortgage, and mortgage taxes (if required by mortgage terms)
- Basic utilities (e.g., heating fuel, gas, electricity, water, sewer and garbage removal)
Planning today for a brighter tomorrow
It is easy to get overwhelmed by the task of planning a lifetime of care. However, a specially trained financial advisor can help develop a clear roadmap for the future — outlining the steps you should take today for a brighter tomorrow.
Download (PDF) your own copy.
1 Financial Advisors are Investment Advisor Representatives of, and offer securities and investment advisory services through Voya Financial Advisors, Inc. (Member SIPC).
2 Payments from an SNT for the above items could reduce SSI payments
Neither Voya Financial Advisors nor its representatives offer tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation.
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