How to Create a Special Needs Trust With an Inheritance

By Regan Rondinelli-Haberek

Parents and other loved ones often have the best intentions when they leave an inheritance to a family member who has disabilities or who has been determined to be disabled by the Social Security Administration. However, this inheritance may do more harm than good because it can interfere with receiving government benefits, such as Supplemental Security Income (SSI) and Medicaid. Drafting an effective special needs trust can be challenging, and a mistake can have serious consequences. It is best to consult an experienced estate planning attorney when considering a special needs trust.

Special Needs Trusts

A special needs trust, sometimes called a supplemental needs trust, holds assets for the benefit of a person, under the age of 65, who has been determined to be disabled by the Social Security Administration. These trusts shelter assets so that they are not considered when the person qualifies for need-based governmental benefits, such as Medicaid or Supplemental Security Income from the Social Security Administration. Assets held in a special needs trust are meant to supplement these government benefits. For instance, trust assets may be used for medical expenses above and beyond what is covered by government benefits, transportation and other necessary expenses. The assets are managed by a trustee, who usually pays trust assets directly to the providers of goods and services for the benefit of the disabled beneficiary.

Creating a Special Needs Trust

To leave a disabled loved one an inheritance, a parent or other family member will often create a special needs trust in his will. The will can simply state that if a beneficiary is deemed disabled at the time of the testator's death, assets will go into a special needs trust This provision of the will names a trustee and lists the terms of the trust, the same as for a standard trust document. In this case, any inheritance is paid directly to the trust, and not to the disabled beneficiary.

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Self-Settled Special Needs Trusts

If a disabled person receives an inheritance outright and he is under age 65, he can use the inherited funds to establish a self-settled special needs trust. It is called self-settled because the trust is funded with the disabled individual's own money. The trust is still managed by a trustee, and the trustee can make direct payments to the providers of goods and services. Although created with the disabled person's inheritance, the trust is established by a parent, grandparent, guardian or the court on that person's behalf. A self-settled special need trust usually contains a pay-back provision to the effect that the state will be repaid for Medicaid costs expended for the beneficiary's benefit upon his death.

Pooled Trusts

If a disabled person is over age 65, he may have the option to put his inheritance into a pooled trust. This is a trust managed by a non-profit organization for the benefit of a large group of people. Generally, there is no pay-back provision with this type of trust. Upon the beneficiary’s death, the money remains in the pooled trust for the benefit of the surviving members of the group. Medicaid laws change often, and, in some states, transfers to a pooled trust can affect Medicaid eligibility. Consult an estate panning attorney for the laws in your state.

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What Items Should Be Put Into a Living Trust?

A living trust is created during a person's lifetime and comes in two types: revocable and irrevocable. A revocable trust allows you to freely transfer your property in and out of the trust. By contrast, the maker of an irrevocable trust cannot serve as trustee or exercise control over the trust's assets, so irrevocable trusts are less flexible than revocable trusts. Many people fund their revocable trusts with their most valuable assets, which usually include the family home, bank accounts and investments.

Reasons to Set Up an Inheritance Trust

A trust occurs when property, in the form of money, real estate or some other valuable item, is overseen by one person for the benefit of another. When trusts are used as part of an inheritance, a trustee typically administers the trust either by protecting the assets for a set period of time, spending the assets on an itemized list allowed in a will, or distributing the assets to beneficiaries in set amounts. These trusts are technically called testamentary trusts, but may be referred to as inheritance trusts, and they are always outlined in a last will and testament. There are several benefits to bequeathing property in a trust fund rather than directly to the beneficiary. If you have substantial assets and are not sure how to distribute them, consult a lawyer for advice on the best way to set up a trust fund.

How Does a Living Trust Protect Assets?

Creating a trust to holds assets can help the grantor while he is alive and continue to serve him after his death. A living trust is created during the grantor's lifetime. It transfers title (ownership) of the grantor's property into the trust to be managed by a trustee for the benefit of a designated beneficiary. There are different types of living trusts and each can protect assets in a different way -- or not at all.

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