Consider Asset Preservation Options Before Establishing Special Needs Trust
For many families, Special Needs Trusts offer an attractive option to preserve assets and property for a loved one who is disabled without making them ineligible for public assistance programs. However, Special Needs Trusts are not the right vehicle for every family. Often, trusts can be limiting in the use of the funds and restricting the beneficiary from direct access to the use of money. Furthermore, the administration of the trust requires a Trustee to understand the proper use of the trusts and how to best utilize the funds for the primary beneficiary, the individual with a disability.
Special Needs Trust Versus Alternative Asset Preservation Options
A Special Needs Trust is a discretionary trust designed to provide for a disabled person’s supplemental care while maintaining their eligibility for public benefits. It holds personal injury settlements, inheritances, and other assets for a disabled beneficiary. The trust asset is transferred into the trust by the grantor, who establishes the trust for a beneficiary. The trustee is the person responsible for managing, investing, and distributing the assets or property of the trust for the designated beneficiary. A Special Needs Trust is established where a beneficiary cannot compel a payment from the trust, and the monies is used for daily needs, such as transportation costs or a cell phone bill. Disbursements from a Special Needs Trust can impact public benefits if the monies are used for payment of rent or cash payments directly to the beneficiary.
Fortunately, other alternatives exist to a Special Needs Trust that may work better for families with disabled loved ones. One method is to spend down the funds for exempt assets. When a person receives funds, they are counted as income in the month received and an asset the following month if they are not spent. A person can purchase exempt assets with these funds to spend them, such as buying a house or vehicle. There are some upper limits on these categories for public benefits, so be sure to check before spending down the assets. But spending down in this context does not mean spending money on unnecessary items just to reach the limits for benefit programs.
Another option is to open an ABLE account. Established by the Stephens Beck Jr. Achieving a Better Life Experience Act of 2014 (ABLE), the law established tax-free savings accounts to cover qualified disability expenses for disabled persons to help ease financial strains. They must be eligible for Social Security Income (SSI) based on disability, entitled to disability insurance benefits, or someone who certified that the person met the disability certification before the age of 26. Typically, contributions to an ABLE account may not exceed the annual gift tax exemption ($17,000 in 2023) in addition to contributing wages equal to or less than their annual gross salary or Federal Poverty Level if their employer does not contribute to a retirement plan.
When dealing with catastrophic disabilities, a plaintiff should investigate asset preservation options before putting a settlement in a Special Needs Trust. You might have better options. Special needs trusts limit the inheritability of settlement proceeds upon the death of the injured person.
