Overview of Special Needs Trusts
An A-B Trust is a way to double the amount of your assets that you can pass tax-free to your family.
A person who receives government assistance based on financial need will ordinarily lose that assistance if he or she receives assets or income over a certain limit. With a properly designed special needs trust, however, a family member or friend can provide certain kinds of benefits to someone without jeopardizing government assistance.
A special needs trust may be established either as a living trust (recommended) or as a testamentary trust. A testamentary trust is not the best solution because it will often have to be administered through the court system, but it is better than nothing.
The living trust is ideal for a parent who wants to create a trust for a child who has a disability but does not want the child to lose eligibility for public benefits. If there are other family members who want to leave something by will but do not want to create a special needs trust in their wills, they can merely make the gift to the existing trust. The parent, of course, can make either a lifetime gift to the trust or a gift to the trust by will.
What are special needs?
The simple definition of special (or supplemental) needs is anything other than basic support expenses such as food and shelter. In other words, paying for anything the beneficiary wants for personal use (other than food or shelter) is allowed. If, however, a special needs trust pays food and shelter expenses, those payments will be considered an available resource and may jeopardize government assistance.
It’s not always easy to know what is and what isn’t food and shelter, so here are some examples:
Basic utilities such as gas, water and electricity are basic shelter expenses that cannot be paid by the trust. However, utilities such as telephone and cable service are not basic and can be paid by the trust.
Food cannot be purchased by the trust, but food supplements can.
Non-consumable items such as toiletries, cleaning supplies and personal care items can be provided by the trust.
There is no limit on the value of household goods as long as they are reasonably necessary for the person to live in his or her residence.
Computers, furniture, and appliances are allowable purchases.
Buying and maintaining a motor vehicle, as well as paying the insurance, is also allowable
Travel expenses, including lodging, meals, and a companion, can be paid by the trust.
Trustee Discretion
The trustee (the person in charge of managing the trust) must have sole and absolute discretion in all decisions regarding distributions to the beneficiary and the administration of the trust. The beneficiary can never have a right to compel distributions from the trust.
That does not mean that the trustee cannot ask the beneficiary what he or she wants (or vice versa). But the final decision is with the trustee.
All purchases by the trust should be paid directly out of the trust. The trustee should never turn over cash to the beneficiary to buy a desired item because cash is equivalent to support in terms of public benefit eligibility.
If the trustee is uncertain as to whether or not an expenditure constitutes a special or supplemental need, he or she should consult an attorney or other professional who is knowledgeable and specializes in special needs trusts.
Expenditures that are prohibited by federal or state regulations, or other mishandling of the trust, can result in the beneficiary being disqualified from pubic benefits.