What Is a Special Needs Trust?

What Is a Special Needs Trust?

Two women baking cookies

Caring for lifetime needs takes a plan – that’s exactly what a Special Needs Trust (also known as, a Supplemental Needs Trust) does for an individual with a disability.

Drafting and funding a special needs trust can help ensure your loved one's eligibility for government programs. These programs provide for life's basic needs, such as food, clothing, medical care, and shelter.

The assets within the trust are designed to provide supplementary funds for expenses that aren't covered by government programs. Funds can be used for education, transportation, entertainment, travel, and out-of-pocket medical and personal care expenses.

How Do I Fund a Special Needs Trust?

Once established, anyone can contribute money or assets to the trust. Oftentimes, special needs trusts are funded through the use of life insurance. Any type of policy is eligible, but when parents are the primary caregivers, typically Survivorship Universal Life (SUL) is used.

A Survivorship Universal Life policy insures two lives, and is payable upon the second death. Typically, a SUL policy is less expensive than one individual permanent policy of the same amount, it creates an instant estate, and can provide a larger sum of money than making the same premium payments directly to the trust.

Having a trust, and a method of funding the trust, gives you the space to concentrate on additional family and personal priorities, knowing that the life-long financial needs of the individual with special needs can be addressed.

Making Sure Gifts Help

Here’s a hypothetical situation. Let’s say Kate decides to lovingly gift each of her grandchildren $10,000 when they reach age 21. One of Kate’s granddaughters has Down syndrome, and by directly accepting the gift, her assets may exceed the resource limits defined by Social Security – potentially rendering her ineligible for SSI and medical benefits.

What could Kate do differently?
Kate could gift the money to the Special Needs Trust, or she could purchase a Single Premium Life policy – listing the trust as owner and beneficiary. Over time, the guaranteed cash value, and dividends (when payable) can be used for the trust's immediate use, or the dividends could purchase paid-up additional insurance to increase the total death benefit payable to the trust.

Lifecycle of a Special Needs Trust

  1. Parents (Grantor) implement a Special Needs Trust
    • Professional involved – Attorney who is qualified and familiar with special needs planning

  2. Funding the trust – Funding can be done through lifetime gifts of most anything of value, or the use of life insurance
    • Gifting – Professional involved – qualified tax advisor
    • Life Insurance - Professional involved – State Farm® agent

  3. Administering a Trust
    • Trust can be administered by a person or institution acting as a trustee
    • Professional involved – Attorney qualified in special needs planning, and/or a qualified tax-advisor.

Disclosures

The information in this article is for informational purposes only and is not legal advice.