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Tuesday Tip: 10/10/2017

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Self-Settled Special Needs Trusts 

Despite the titling, these trusts are typically created by a family member with help from a court for an individual with special needs. The trust is set up as a place where funds in the individual's name can be held without affecting his or her eligibility for government benefits, because these benefits cease once he or she has more than $2,000. 

Only funds in the individual's name or to which he or she is entitled should be placed in this kind of trust. Generally, they are utilized when an individual with special needs is entitled to receive a court award, such as a judgement or structured settlement, but can also be used in other cases such as parental divorce to receive child support and/or alimony, which would otherwise be considered income to the individual. 

There are four important things to note in regards to these trusts: 

First, typically these trusts must be approved by your state's Medicaid agency prior to being established to ensure they follow certain rules.

Second, if possible, these trusts should primarily be used to provide supplemental support to an individual with special needs, not staples like food and housing. This is because food and housing are considered "in-kind support and maintenance" which if provided from trust funds will cause a reduction in SSI benefits.

Third, these trusts are required to have a "payback" provision contained in them. This provision subjects the remaining funds in the trust at the beneficiary's death (the special needs individual) to go toward reimbursing the state for medical services rendered through Medicaid during the beneficiary's life.

Fourth, it may seem obvious, but these trusts must be drafted by an attorney, preferably one who is experienced in special needs planning and is familiar with your state's requirements. 

Third-Party Special Needs Trusts

Third-Party Special Needs Trusts stay true to their name in that they are created and funded by others for the benefit of an individual with special needs. Like Self-Settled Special Needs Trusts, they are a place to hold funds for the benefit of an individual with special needs, without affecting his or her government benefits. 

They can provide greater flexibility than Self-Settled Special Needs Trusts and are less work to set up because they do not require approval from your state or a court. They can be set up while the Settlor (person establishing) is alive or contained as a provision in a will or another trust to come about at death. 

However, just like in a Self-Settled Special Needs Trust, funds should only be used to provide supplemental support, other than food and shelter to avoid a reduction in government benefits. This does not mean the funds will be restricted, as the term "supplemental support" has been argued in many court cases and typically flexibility has been upheld, including among other things:

  • Clothing
  • Vehicle
  • Computer
  • Vacation
  • Entertainment
  • Irrevocable burial reserve

As long as the purchase is considered to be "reasonable", solely for the benefit of the beneficiary with special needs, and not for food or shelter, there's a good chance it will be okay.

Two important things to note regarding these trusts:

First, they do not require and should not include a "payback" provision to your state for medical services rendered through Medicaid. If you currently have a Third-Party Special Needs Trust in place, it's important to check to ensure this is the case. In many instances, attorneys who are not experienced in this area but have drafted this kind of trust will mistakenly include the provision, which can turn out to be detrimental if not corrected.

Second, as before it may seem obvious but is backed up in the note above, these trusts must be drafted by an attorney, preferably one who is experienced in special needs planning and is familiar with your state's requirements.

Special Needs Trusts are great planning tools that can greatly benefit your loved one and open the door to many strategies to provide for his or her future that might not otherwise be available. If you'd like to discuss Special Needs Trusts and how they can fit into your finances, don't hesitate to reach out!


Mychal Eagleson, CFP®, AAMS® is the President of An Exceptional Life Financial, a firm that specializes in financial planning for teachers and families with special needs. He frequently writes and speaks on personal finance topics relating to these clients. Mychal also serves on the board of the Financial Planning Association of Greater Indiana as the Director of Public Relations & Social Media. To read more of his articles or learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.