Special Needs Trusts

IF YOU HAVE A CHILD with a physical or mental disability who is unlikely to be self-supporting, you might set up a special needs trust, either during your lifetime or upon your death. By placing money in the trust, not only can you specify how the money should be spent, but also you won’t disqualify the child from receiving means-tested government benefits.

Typically, if a child has more than a modest amount of cash in his or her name, the child will be disqualified from receiving Medicaid and Supplemental Security Income. The SSI program pays benefits to disabled adults and children with modest incomes and few assets. To avoid disqualification, you might encourage family and friends to make gifts to the trust, rather than directly to your son or daughter.

The trust shouldn’t disburse money to the beneficiary, because that could also disqualify the child from receiving government benefits. Instead, the money should be used to pay directly for goods and services for the child, such as education costs, entertainment, vacations, a personal attendant and out-of-pocket medical expenses.

Make sure you use a qualified attorney to set up the trust. Carefully consider whom to appoint as trustees. You might pair a corporate trustee, such as a bank or trust company, with a family member. Look closely at the costs charged by the corporate trustee. Also ask the attorney whether the trust will be required to reimburse Medicaid after the beneficiary’s death—and whether it’s possible to sidestep this requirement.

Next: Spendthrift Trusts

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