Setting Up A Trust For Someone With Special Needs

Government law says that a person with a disability cannot have a trust. However, in 1993, Congress created an exception under the amendments to the Omnibus Budget and Reconciliation Act (OBRA-93) which specifically authorized the use of Supplemental Needs Trusts for the benefit of individuals who are under the age of 65 years and disabled according to Social Security standards. Congress has imposed some very stringent rules and regulations on the use of Supplemental Needs Trusts. For this reason, any family contemplating using a Supplemental Needs Trusts should consult an experienced attorney.

In short, a Supplemental Needs Trust (sometimes called a Special Needs Trust) is a specialized legal document that enables an individual with a disability or chronic illness to have, held in Trust for his or her benefit, an unlimited amount of assets. The trust is its own entity and is managed by a trustee on behalf of the person with the disability.

Why is this important? Because assets in a properly-drafted Supplemental Needs Trust are not considered “countable” assets for purposes of qualification for certain governmental benefits, such as Supplemental Security Income (SSI), subsidized housing, or Medicaid. Therefore, a Supplemental Needs Trust can provide extra care over and above that which the government provides. Although services available through government benefit programs may be substantial, the actual cash benefits are generally quite small and force the individual to live way below the poverty level. Also, a properly drafted trust will protect the trust against creditors or government agencies trying to obtain funds to pay for debts of the person or the family.

The following are some basic requirements for a Supplemental Needs Trust:

  • It must be irrevocable;
  • Is established by a person (grantor or settler), or family member other than the person with the disability;
  • It is its own “entity” with its own Employer Identification Number and is not registered under either the Grantor’s or the Beneficiary’s Social Security Numbers;
  • Is managed by a trustee (and successor trustees) other than the person with the disability;
  • It gives the trustee the absolute discretion to provide whatever assistance is required;
  • It should never give the person with the disability more income or resources than permitted by the government;
  • It must be used for supplementary purposes only; it should add to the things provided by the government benefit program, not replace them;
  • It defines what it means by supplementary/special needs, as well as the unique needs of the person with the disability;
  • It determines who should receive the remainder of the trust if the individual with the disability should die; and
  • It provides instructions for the person’s final arrangements upon death;

Since the trust is a legal arrangement that is regulated by state laws, and it is the responsibility of each state government to regulate trusts and administer the federal benefits, there may be other requirements that are state specific.

About the author

Russell D. Francis, CPA, CFP®
Russell D. Francis, CPA, CFP®

Russell D. Francis, CPA/PFS, CFP® started Portland Fixed Income Specialists, LLC in 2012. Portland Fixed Income Specialists is an Oregon fee-only Registered Investment Advisor. We do not accept commissions for financial products or referral fees. Every decision we make is based on the best interests of our clients.

We simplify the financial planning process for you by carefully considering how it applies to your unique situation. We then provide you with the information, advice and alternatives necessary to align your financial decisions with your values, needs, and goals in life. The benefits of this approach are many – you enjoy a greater understanding of the choices you make and are confident when implementing those choices.

And, because we’re a Certified Public Accounting (CPA) firm as well as a Registered Investment Advisor, you benefit from our knowledge of the complex relationship between investments and taxes.

One Comment

Leave a comment
  • Dear Russ,
    My father’s will instructed me, the executor, to establish a trust for the benefit of my surviving mother. The name of the trust is under the will of my father for the benefit of my mother. My mother is a trustee as well as my sister and me. Upon my mother’s death she obviously is no longer a trustee nor a beneficiary leaving only my sister and me. Can we then dissolve the the trust and then split the the trust’s holdings free of federal and state taxation since it is outside my mother’s estate?

    Thank you for your time.

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Copyright 2014 FiGuide.com   About Us   Contact Us   Our Advisors       Login