If you have a relative or friend with a disability, you likely understand how difficult it can be to pay for everyday items and medical care. Fortunately, for many disabled individuals, needs-based government assistance is available. To qualify for Medicaid, Supplemental Insurance Income and many other programs, though, a person must have limited income and assets.
Ensuring your loved one has the financial resources he or she needs to thrive is a noble goal. You probably do not, however, want to waste money needlessly. That is, if the person can use government assistance, you would rather use your funds for other things. You must realize, nonetheless, that many government programs restrict how recipients may use the money they receive. When you are preparing your estate plan, creating a special-needs trust may be an effective bridge.
The purpose of special-needs trusts
A special-needs trust holds funds that support a disabled person’s quality of life. Because the funds are in trust, they usually do not count as income or assets when applying for needs-based government benefits. Even better, there is no real restriction on using funds from the trust, provided funds do not cover essential needs. That is, the beneficiary may access funds to pay for supplemental expenses that needs-based programs may prohibit, such as travel, sporting equipment and entertainment.
Three ways to fund a special-needs trust
If you want to set up a special-needs trust, you should know about the common options for funding one. Typically, there are three:
- Family-funded special-needs trusts use contributions from relatives and friends.
- Benefits-funded special-needs trusts use contributions from insurance, lawsuits or settlements.
- Inheritance-funded special-needs trusts use contributions from someone’s estate.
While needs-based government assistance may give your disabled relative or friend enough money to cover basic expenses, it may not offer a boost to quality of life. If you want to help your loved one, setting up a special-needs trust may be the right approach. Of course, before you do so, you must understand how this type of trust fits in your overall estate plan.