Families that include someone with a disability qualifying for government benefits may want to look into setting up a special needs trust.
"It is the policy of the federal and state governments to take care of only the essential needs of the individual and support them at or below the poverty line," said Hal Wright, a Centennial, Colorado-based special needs planning consultant and author of The Complete Guide to Creating a Special Needs Life Plan.
A special needs trust lets parents, other family members and other interested parties contribute funds for the benefit of a disabled person, while also enabling him or her to still receive means-tested benefits such as Medicaid and Security Supplemental Income (SSI). These benefits programs require recipients to have no more than $2,000 in assets and also place limits on income.
Special needs trusts can also protect against the financial abuse of a disabled person and provide oversight to make sure funds are spent wisely.
Money in a special needs trust can cover supplemental needs not covered by Medicaid and SSI, such as recreation and dental and vision costs. However, money given directly to the trust beneficiary could be counted as income and cause benefits to be reduced or suspended.
Deciding how much to put in trust
A key question is how much money will adequately fund a special needs trust. The answer depends on factors such as the nature of the disability and level of care required. It could range from tens of thousands of dollars to millions. Financial planners who specialize in special needs can help a family consider the choices.
There is no minimum amount required to fund a special needs trust. However, because of costs to set up and manage trusts, $100,000 is the least some experts recommend for funding a trust. Trusts may be funded by family assets, inheritances, lawsuit awards or life insurance policies that pay when one or both parents die.
Simple special needs trusts typically cost approximately $2,000, according to Kelly Kaeser, an attorney in Moorpark, California. Costs may rise several thousand dollars or more, depending on size and complexity.
Trustees, typically bank trust departments, may charge 0.5 percent to 1.5 percent per year, according to Kaeser. "Typically, you see a trustee working for free when the trustee is close family looking after someone they love and care for as the beneficiary," Kaeser said. "It's a role that carries a serious responsibility."
Different trusts for different needs
Special needs trusts come in two main varieties. First-party special needs trusts can be set up by adults who accumulate assets before the onset of a disability or receive assets after qualifying for Medicaid and SSI. The most common kind of trusts, however, are third-party trusts, which are typically set up by families to benefit children.
Families with smaller financial resources may prefer alternatives. A 2016 federal law permits state-managed ABLE accounts. These are similar to 529 college savings plans and can replace special needs trusts with less cost and complexity. They can accommodate up to $100,000 without affecting means-tested benefits.
Another option is a pooled-asset trust. These are charitable pools available in most states that combine assets of multiple beneficiaries into a larger portfolio. "They're an alternative to individual special needs trusts that serve people with only modest assets," said planning consultant Wright.
Assembling a trust team
Setting up a special needs trust calls for expert help. Rules are complex and strict. It requires close attention to make sure a disabled person's financial resources don't exceed the means testing limits.
"It could be a credit card with a $2,000 limit," said Mike Walther, a certified financial planner with Oak Wealth Advisors. "The government counts a credit card as being used to the full limits every month."
Families that may want to consider a special needs trust should keep the following in mind:
- Take stock of disabled persons' current and likely future state of health and ability to care for themselves. Decide what level of future care is essential or desirable.
- Gather information on family financial assets, including insurance policies and investment and retirement accounts. Consider whether a trust would be best funded by making regular contributions up to the annual amount of the gift exclusion tax, or through a life insurance policy.
- Start building a team, beginning with an attorney specializing in trusts and estates or elder law. "Trusts are legal documents and families should focus on engaging with attorneys that have specialized in the field," said Todd Sensing, a certified financial planner and special needs consultant at FamilyVest. "Many can be found at the Academy of Special Needs Planners or Special Needs Alliance."
Attorneys may be able to give referrals to financial planners skilled in special needs planning. Personal referrals are another good source. "The special needs community is a tightly knit community," said special needs planning consultant Wright. "All families in that share a common experience."
Involve the whole family
Part of setting up a trust is conferring with everyone in the family to see that any bequeathals, gifts or other transfers go to the trust rather than the disabled individual. "If money is passing right down to that individual, that's a huge blunder," said Donald H. McCarty Jr. a certified financial planner and specialist in special needs planning with Financial Decision Partners.
A special needs trust is not a set-and-forget solution, in part because Social Security makes frequent changes to its already-complex rules, said Walther of Oak Wealth Advisors. "It's important even after your trust is drafted and funded with assets that you stay in touch with your law firm so if there are changes you can react and aren't caught by surprise," he said.
— By Mark Henricks, special to CNBC.com