When planning for the financial security of a disabled child or grandchild, parents, grandparents, and guardians often seek solutions that ensure long-term care and protection while maintaining eligibility for government benefits. A trust can be a powerful tool in such scenarios, offering flexibility and ensuring that loved ones are well cared for even after the primary caregiver is gone. In this blog post, we’ll explore how a trust can be used to provide for a disabled child or grandchild, the types of trusts available, and the benefits they offer.

Why Should You Consider a Trust for a Disabled Child or Grandchild?

A trust allows assets to be managed and distributed according to the wishes of the person creating it (called the grantor). For families with a disabled child or grandchild, using a trust offers several significant advantages:

1. Preserving Eligibility for Government Benefits: Disabled individuals may qualify for government programs like Medicaid or Supplemental Security Income (SSI). These programs have strict income and asset limits. If a disabled person inherits money or receives large gifts, it could disqualify them from receiving these benefits. A well-structured trust ensures that any funds set aside do not interfere with the individual’s eligibility for these vital programs.
2. Control and Flexibility: Trusts provide the grantor with control over how and when funds are distributed to the disabled person. This can help ensure that the child or grandchild’s needs are met consistently, even if they are unable to manage money themselves.
3. Long-Term Financial Security: A trust can provide for the long-term care of a disabled individual, ensuring that they have financial resources for healthcare, living expenses, education, and other needs throughout their lifetime.
4. Professional Management of Funds: Trusts can be managed by a trustee, who is responsible for overseeing the assets and making distributions according to the trust’s terms. This ensures that the funds are properly managed and used for the benefit of the disabled individual.

Types of Trusts for a Disabled Child or Grandchild

There are several different types of trusts that can be used to provide for a disabled child or grandchild, each with specific advantages. The choice of trust depends on factors such as the individual’s needs, the amount of assets, and the type of government benefits the individual receives.

1. Special Needs Trust (SNT)

A Special Needs Trust (SNT), also known as a Supplemental Needs Trust, is the most common type of trust used to provide for a disabled person without affecting their eligibility for government benefits like SSI or Medicaid.

Key Features of a Special Needs Trust:

• Maintains Eligibility for Benefits: The primary advantage of an SNT is that it allows the disabled person to receive gifts or inheritances without jeopardizing their access to benefits. Since the assets in the trust are not considered the beneficiary’s personal assets, they are not counted when determining eligibility for government assistance.
• Funds Can Be Used for Non-Essential Needs: An SNT can be used to pay for things that government benefits do not cover, such as education, transportation, personal care, vacations, and entertainment. This ensures that the disabled individual can enjoy a higher quality of life while still receiving essential government aid.
• Types of Special Needs Trusts:
  • Third-Party SNT: This trust is funded by someone other than the beneficiary, such as a parent or grandparent. It allows the grantor to ensure that their loved one is provided for without risking their government benefits.
  • First-Party SNT: This trust is funded with the beneficiary’s own assets, such as a personal injury settlement or inheritance. These trusts are subject to Medicaid payback provisions, which means that if the beneficiary passes away, any remaining funds may be used to repay Medicaid for benefits provided.

2. Revocable Living Trust

A revocable living trust is another option for families looking to provide for a disabled child or grandchild. While not specifically designed to protect eligibility for government benefits, it can be used to control the distribution of assets during the grantor’s lifetime and after death.

Key Features of a Revocable Living Trust:

• Control During Lifetime: A revocable living trust allows the grantor to maintain full control over the assets during their lifetime, with the ability to modify or revoke the trust as circumstances change.
• Probate Avoidance: Assets held in a revocable living trust do not go through probate upon the grantor’s death, providing quicker access to funds and avoiding the public process of probate.
• Inclusion of Special Needs Provisions: A revocable living trust can be combined with a special needs trust provision for a disabled beneficiary, enabling both estate planning flexibility and protection of government benefits.

3. Pooled Trust

A pooled trust is another type of trust that can be used by individuals with disabilities, especially if the disabled person has a small amount of assets. This type of trust pools funds from multiple beneficiaries, which are managed by a non-profit organization.

Key Features of a Pooled Trust:

• Shared Resources: Assets are pooled together with those of other beneficiaries and professionally managed. Each beneficiary has a separate account, but the pooled funds are invested collectively to reduce administrative costs.
• Cost-Effective: Since pooled trusts consolidate resources, they are typically less expensive to set up and maintain compared to individual special needs trusts.
• Maintains Government Benefits: Like special needs trusts, pooled trusts do not count as the beneficiary’s personal assets for purposes of government benefit eligibility.

4. Testamentary Trust

A testamentary trust is a trust created under the terms of a will and only comes into effect upon the death of the grantor. This type of trust can be used to provide for a disabled child or grandchild after the grantor’s death.

Key Features of a Testamentary Trust:

• Posthumous Benefit: It can be a way for a parent or grandparent to ensure that their disabled child or grandchild is cared for after their death.
• Flexibility: The testamentary trust can include provisions for both the financial needs and special needs of the beneficiary.
• Government Benefits: Like other special needs trusts, a testamentary trust can be structured to ensure that government benefits remain intact.

Key Considerations When Setting Up a Trust for a Disabled Child or Grandchild

1. Choosing the Right Trustee: The trustee plays a crucial role in managing the trust and making decisions that align with the beneficiary’s needs. It is important to choose someone who is both trustworthy and knowledgeable about the special needs of the disabled individual. Professional trustees, such as trust companies or financial institutions, may also be an option.
2. Funding the Trust: When creating a trust, it is essential to fund it with assets. This could include cash, investments, real estate, or life insurance policies. Regular contributions may be needed to ensure the trust has enough funds to cover future expenses.
3. Reviewing the Trust Regularly: It’s important to review and update the trust regularly to reflect changes in the beneficiary’s needs, family circumstances, or changes in laws regarding government benefits.
4. Consulting with an Attorney: Trusts for disabled individuals are complex and must be set up correctly to ensure they serve their intended purpose. Consulting with an attorney who specializes in special needs planning is essential for ensuring that the trust complies with legal requirements and protects the disabled person’s eligibility for government benefits.

Conclusion

A trust is a highly effective way to provide for a disabled child or grandchild, offering both financial security and peace of mind. Special needs trusts, in particular, are designed to ensure that the individual can benefit from additional resources without losing access to essential government benefits. Whether you choose a special needs trust, pooled trust, or another type of trust, it is important to work with legal and financial professionals to create a plan that meets the unique needs of your loved one. With careful planning, a trust can provide long-term financial support and enhance the quality of life for a disabled child or grandchild, both now and in the future.