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Special needs trusts are a savvy financial planning tool

A special needs trust is a vital financial planning tool for many of the 54 million Americans who have a mental or physical disability. Many disabled individuals have unique financial planning needs because of the federal and state laws that cap the amount of assets that a person can have in order to qualify for Medicaid and Supplemental Security Income.

Public aid programs can pay for most of a disabled person’s medical expenses and housing but individuals may not qualify for public benefits if their assets exceed $2,000, Reuters reports. A special needs trust, sometimes called a supplemental care trust, is a way for disabled individuals to qualify for these important programs without being impoverished.

Special needs trusts can be institutionally or individually directed. An example of an institutionally directed trust is a court-directed trust that contains settlement money for a catastrophically injured car accident victim. The state has a lien on the trust and Medicaid is paid back when the beneficiary dies. The court can also determine whether a bank is the sole administrator of the trust or if a member of the beneficiary’s family will act as a co-trustee.

An individual special needs trust is typically created by a family member who has a disabled dependent. Individual trusts are funded in a variety of ways such as life insurance and inheritances. These trusts can help protect the dependent family member’s public aid and ensure their financial stability if they survive the family members who care for them.

Although individual situations vary, special needs trusts are very flexible and should be considered by both catastrophically injured adults and parents raising children with special needs.

Source: Reuters, “Putting the special in special needs trusts,” 3/4/11