The two entirely different types of trusts that are usually referred to as “special needs” trusts are treated differently for tax purposes, benefit determinations, and court intervention.
We already discussed Self-Settled Special Needs Trusts in our prior blog post. The second type is the third-party special needs trust.
The Third-Party Special Needs Trust
The second type of special needs trust is established by someone other than the person with disabilities. This is usually, but not always, a parent. In this case, the trust assets never belonged to the beneficiary. This type of trust is often used as an effective planning tool to hold an inheritance or gift for a person with special needs. While it may be possible to set up a trust after an inheritance, the funds will still have been legally available to the beneficiary, and thus will be considered a self-settled special needs trust. Parents, grandparents, and other family members and friends with the foresight to leave funds in a third-party special needs trust will provide substantially better benefits to a beneficiary with disabilities.
The following are some key points about third-party special needs trusts:
- A third-party special needs trust may pay for food and shelter for the beneficiary. However, these types of expenditures may result in a temporary reduction in the beneficiary’s SSI payments.
- A third-party special needs trust may be distributed to other family members or charities upon the death of the primary beneficiary.
- A third-party special needs trust may be terminated if the beneficiary’s disability improves, and he or she no longer needs to be eligible for SSI or Medicaid.
- A third-party special needs trust will generally not have to submit a strict accounting of the trust to the state to keep the beneficiary eligible for Medicaid.
- A third-party special needs trust will be taxed separately and at a higher rate than a self-settled trust to the extent, income is saved inside the trust.
State programs and services that supplement SSI, often funded by Medicaid and other government benefit programs, such as vocational rehabilitation programs, also are significant contributors to improving the lives of individuals with disabilities and special needs. When administering a special needs trust, a trustee must consider all the resources of available programs and services while taking special note of any restrictions on the use of trust funds required by these programs.
Rubin Law is a unique organization with a solitary purpose. We are a law firm solely dedicated to improving the lives of children and adults who suffer from intellectual disabilities, developmental disabilities, and mental illnesses. Rubin Law is the only law firm in Illinois that limits its practice to providing legal services and future planning for adults and children with special needs. We offer patience, compassion, and a special understanding to those with disabilities and those who care for them. For more information, email us at email@example.com or call 866-TO-RUBIN.