How to Create a Special Needs Trust With an Inheritance

By Jennifer Kiesewetter, J.D.

How to Create a Special Needs Trust With an Inheritance

By Jennifer Kiesewetter, J.D.

A special needs trust is a legal document that is prepared for the care of a disabled person under the age of 65. If you're establishing one, you're called the grantor. The disabled person is the beneficiary. To create this type of arrangement, you need to understand the unique purpose and requirements. For example, these documents create an individualized life plan for the disabled individual as well as focusing on their specific needs for daily living.

Little girl in a wheelchair using a laptop while a man pushes her through a kitchen

When you have access to an inheritance, you can create one with this designated money. However, by using an inheritance, you may interfere with the beneficiary receiving federal or state governmental benefits, such as Social Security Income or Medicaid benefits. Let's look at what steps are required to create yours with an inheritance.

1. Gather the required information.

Before you start drafting it, you must gather all necessary information. For example, you should determine the daily habits and specific needs of the beneficiary. Each recipient's disability is unique, so as a family member or close friend, you can identify their particular likes and dislikes.

Further, you should gather all medical records. You'll also need their social security number and the sources of any funding for it, such as the amount of the inheritance and any related bank account information.

2. Determine what type you need.

Two types exist here: a first-party or a third-party trust. If the beneficiary's property funds the arrangement, such as an inheritance, then this is a first-party arrangement. If someone else's property supports it, then it's a third-party account.

A first-party method is typical when using an inheritance for funding. These are often called self-settled special needs trusts. A third-party method is common when the parents of a disabled individual fund it. These wishes can be included in someone's last will and testament. Further, multiple people can fund them. In both types, the legal document typically contains state pay-back language, meaning that it will reimburse the state for its Medicaid costs upon the beneficiary's death.

3. Identify whether or not you have a pooled trust.

A non-profit entity maintains this for the benefit of multiple disabled beneficiaries over the age of 65. They can be first-party or third-party arrangements. The non-profit entity establishes separate accounts for each recipient. However, the entity manages and invests the assets as a pooled account.

Further, a master legal document governs this arrangement. Each beneficiary participates in it through a joinder agreement. They must meet the government's definition of “disabled." Typically, the law doesn't require state pay-back language in it.

4. Draft the document.

When drafting a special needs trust, be sure to check both federal and state law for the requirements. Most documents indicate that the arrangement provides supplemental care to the disabled beneficiary, above and beyond governmental assistance. Additionally, it should state that it's not a basic support trust.

Since these arrangements are primarily federal law creations, you should include any required Social Security Administration benefit language as well as the necessary pay-back language for Medicaid. Make sure you include all relevant federal law within the document.

5. Obtain a tax identification number.

When setting up the your arrangement, you'll need to get a federal tax identification number for the arrangement. To apply for a tax identification number, you'll need to complete an IRS Form SS-4, which will include information regarding the trust, grantor, trustee, and social security number.

Additionally, you'll need to state what type of arrangement you've created and how it's funded. Finally, you'll need to provide the address, so that you can receive any critical information on the taxation of the arrangement.

As long as you include the required federal and state language within the legal document, you can create a special needs trust yourself. If the disabled beneficiary has an inheritance, you need to make sure you set up the recipient for success.

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