Two Examples Of How To Use A Special Needs Trust Correctly

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Two Examples Of How To Use A Special Needs Trust Correctly

29 May 2019
 Categories: Law, Blog

If you have an adult child who has a lifelong disability, a supplemental needs trust is a great means of securing his or her future. It allows you and other relatives to set aside significant amounts of money for your child's future needs without endangering his or her entitlement to benefits like Supplemental Security Income or Medicaid.

Unfortunately, if the trustee who is managing that special needs trust doesn't understand the rules that go along with disbursements, the protections offered by the trust can fall by the wayside and your child can be penalized. Here are some examples that can help you and the trustee understand the right (and wrong) way to use funds from the trust.

Using Trust Funds For Rent Payments Or Home Purchase

One of the primary concerns the trustee may have is making certain that the individual with special needs has appropriate housing. However, paying the beneficiary's rent payments will cause a problem with Supplemental Security Income (SSI) if the beneficiary is entitled to that particular form of disability payments. Paying the rent out of the trust would be considered "free shelter" and the beneficiary's SSI check would automatically be reduced by one-third each month.

Buying the beneficiary a home may be a better solution, but the trustee would be well-advised to get some legal advice from a company like Life's Plan Inc before proceeding because there can also be complications with that method of providing the beneficiary with shelter. In most states, the best method of accomplishing your goal without future problems is to deed the home directly to the beneficiary rather than keeping the deed part of the trust. 

In many cases, it may be simpler and wiser to use the financial benefits the disabled individual receives from SSI or Social Security Disability (SSDI) to pay rent on a home or apartment and use the funds in the trust for other things.

Using Trust Funds To Pay For Furniture Or Other Household Needs

You may naturally be concerned about the quality of your disabled child's life once you are gone. Part of the special needs trust can certainly be used to enhance his or her quality of life in numerous ways as long as the trustee understands how the funds have to be disbursed.

There's nothing in the rules for SSI or Medicaid that penalize a beneficiary for being the recipient of gifts like furniture or electronics but the rules do penalize beneficiaries for having certain assets that are valued above $2,000. Generally speaking, "household goods" are excluded, regardless of their value, so a trustee can purchase new living room furniture, beds, and other pieces of furniture for the beneficiary without concern.

However, it's very important for the trustee to handle the purchase directly. If the trustee simply withdraws money from the trust and gives it to the beneficiary, that's considered a cash disbursement. Even if the beneficiary goes directly to the furniture store and buys the item that the money was intended to buy, the mere act of handing over the cash can have an effect on the beneficiary's monthly entitlement to both SSI and Medicaid. 

If you're setting up a special needs trust for your disabled child, make sure that you work closely with your trustee so that everyone understands how disbursements need to work in order to best protect your child's interests.