Special Needs Financial Planning: What Families Need to Know

Dealing with a disability, either your own or that of a family member, is challenging enough. Add the financial implications, and it can be downright overwhelming. How does one qualify for and access government benefits? How do we protect assets so that those benefits are not restricted or lost? How do we project the life-long cost of living? How do we protect decision making when parents are no longer available?

Working with a Certified Financial Planner® professional can be invaluable, particularly one with additional special needs training.'

Special Needs Trusts

A special needs trust is a legal entity tasked with the supplemental financial support of an individual with a disability.

Like all trusts, it has a trustee and a beneficiary. The beneficiary is the individual with special needs. The trustee(s) is another individual or corporation whose job it is to distribute the assets from the trust to the beneficiary according to their needs.

Frequently, the initial trustee is a family member, typically a parent. But after the parents are gone, a designated secondary trustee takes over that role and makes the necessary funding decisions and distributions while maintaining compliance with tax law and documentation requirements.

Why Use a Special Needs Trust?

There are two main reasons.

1. To provide support and oversight for the financial needs of the individual with special needs. Many are unable to make appropriate decisions on their own. A trust can be one of the safest mechanisms to help them. The trustee is legally obligated to act as a fiduciary for the beneficiary. A trust can help prevent abuse.
2. To protect assets and maintain government benefits. To qualify for certain disability-related Social Security income and Medicaid benefits, an individual may be limited to $2,000 in personal assets. Any assets in a special needs trust are not counted. So, it is the best mechanism to save and invest for the lifelong needs of your family member with special needs.

Types of Special Needs Trusts

It is important to choose the appropriate type of trust, as there are implications for each choice. Perhaps the largest is what happens to any money that is left in the trust after the beneficiary dies.

There are three main types of special needs trusts:

• A first-party trust is funded by the beneficiary. Typically, this would be from preexisting personal assets or a lump-sum distribution due to a legal award from a medical claim, for example. First-party trusts come with a Medicaid claw-provision, which means that Medicaid has the right to reimburse itself from leftover trust assets for the benefits it has paid out over the years.
• A pooled trust is managed by a corporation and is often used if there is a relatively small amount of money funded by the beneficiary that is pooled together with other beneficiaries into a collective trust. Any leftover money is retained and made available for other member beneficiaries.
• A third-party trust is funded by outside individuals, like parents or other relatives. The money is a gift to the trust for the benefit of the individual with special needs. Leftover money is inaccessible to Medicaid and can flow to a designated secondary beneficiary that does not have to be disabled (e.g., a sibling or other family member).

If you have a family member or other loved one with a disability, it is important to engage with both a Certified Financial Planner® professional and an estate attorney with additional training in special needs planning. They can ensure that you are creating the correct type of special needs trust with the appropriate language to ensure that it is compliant with state law and is accomplishing the two purposes listed above. This might mean the difference between a successful financial outcome and a considerably less desirable quality of life.