How to set up a special needs trust

Families with people with disabilities who are eligible for government assistance may want to consider setting up a special needs trust.

Hal Wright, a special needs planning consultant based in Centennial, Colorado and author of The Complete Guide to Making a Special Needs Life Plan.

Special needs trusts allow parents, other family members, and other interested parties to contribute funds for the benefit of people with disabilities, while allowing them to still receive their controlled benefits. facilities such as Medicaid and Security Supplemental Income (SSI). These benefit plans require recipients with no assets of more than $2,000 and also set income limits.

Special needs trusts can also protect against financial abuse by a disabled person and provide oversight to ensure funds are spent wisely.

Special needs trusts may pay for additional needs that are not covered by Medicaid and SSI, such as entertainment and dental and vision expenses. However, money given directly to trust beneficiaries may be counted as income and cause benefits to be reduced or suspended.

An important 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 the level of care needed. It can range from tens of thousands of dollars to millions of dollars. Financial planners who specialize in special needs can help a family weigh their options.

There is no minimum amount required to fund a special needs trust. However, because of the cost to set up and manage the trust, $100,000 is the least amount that some experts recommend to fund a trust. Trusts can be funded with family property, inheritance, a lawsuit award, or a life insurance policy that pays on the death of one or both parents.

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According to Kelly Kaeser, an attorney in Moorpark, California, simple special needs trusts typically cost around $2,000. Costs can add up to several thousand dollars or more, depending on size and complexity.

Trustees, which are typically bank trust divisions, can charge a fee of 0.5% to 1.5% per year, according to Kaeser. “Typically, you see a trustee working for free when the trustee is a family member who is taking care of someone they love and care for as a beneficiary,” says Kaeser. “It’s a role that carries a serious responsibility.”

There are two main types of special needs trusts. First-party special needs trusts can be set up by adults who accumulated assets before the onset of disability or received assets after qualifying for Medicaid and SSI. However, the most common type of trust is a third-party trust, often set up by families to benefit children.

Families with smaller financial resources may prefer alternatives. Federal law in 2016 allows state-managed ABLE accounts. These plans are similar to 529 college savings plans and can replace special needs trusts with less cost and complexity. They can hold up to $100,000 without affecting vehicle-tested benefits.

Another option is a lump sum trust. These are charitable funds available in most states that combine the assets of multiple beneficiaries into a larger portfolio. “They are an alternative to individual special needs trusts that serve people with only modest assets,” says planning consultant Wright.

To establish a special need for trust, call for expert help. The rules are complex and strict. It requires close attention to ensure that the financial resources of a person with a disability do not exceed the vehicle testing limit.

“It could be a credit card with a $2,000 limit,” says Mike Walther, a certified financial planner with Oak Wealth Advisors. “The government charges a credit card used up to its monthly limit.”

Families who may want to consider a special needs trust should keep the following in mind:

• Consider the current and possible future health and self-care abilities of the person with a disability. Decide whether future care is needed or desired.
• Gather information about the family’s financial assets, including insurance policies and retirement and investment accounts. Consider whether a trust would be best funded by making regular contributions up to the annual gift exclusion tax amount, or through a life insurance policy.
• Start building a team, starting with an attorney who specializes in trusts and real estate or elder law. “A trust is a legal document and families should focus on interacting with the laws,” says Todd Sensing, a certified financial planner and special needs consultant at FamilyVest. expert in this field.. “Many can be found in Special Needs Planning Academy or Special Needs Alliance. “

Attorneys can refer financial planners with special needs planning skills. Personal referrals are another good source. “The special needs community is a close-knit community,” said Wright, a special needs planning consultant. “All the families in there share the same experience.”

Part of setting up a trust is making it visible to everyone in the family that any estates, gifts, or other transfers go to the trust and not to the individual with a disability. Donald H. McCarty Jr., a certified financial planner and expert in special needs planning with a Financial Decision Partner.

Walther of Oak Wealth Advisors says a special needs trust isn’t a foolproof solution, in part because the Social Security Administration makes frequent changes to capital rules has complicated its own. “It is important even after your trust is drafted and funded with assets that you stay in touch with your law firm so that if there are changes you can react and not surprised,” he said.

– By Mark Henricks, special for CNBC.com