We want to take a few minutes to debunk some common myths about special needs trusts. We tackled a similar project last year, debunking myths about wills and trusts. But these trusts are special. And there are plenty of special myths about special needs trusts.
Before we begin, though, we have to remind our readers: there are two very different types of special needs trusts. Actually, there are more than two. But for our purposes, we can identify all special needs trusts as one of two types.
The first is the special needs trust a concerned parent might set up for her child. The parent may intend to leave all or some of her estate to the trust. We usually call that type a “third-party” special needs trust.
The other is the kind that same concerned parent might set up to handle her child’s inheritance from the child’s grandfather. Unfortunately, grandpa didn’t plan ahead, and he just left a significant amount of money to the child with a disability. Or perhaps the child with a disability was involved in a lawsuit, and has received a settlement of the litigation. We usually call this a “self-settled” (or, sometimes, “first-party”) special needs trust.
With that background, let’s review some of the most common myths about special needs trust (of whichever type):
Without a special needs trust, my child will lose her benefits
Actually, that’s not always the case. Or it may be at least partially inaccurate.
The American public benefits system is astonishingly convoluted and complicated. Many public benefits programs require the recipient to have limited assets, but not all do. Social Security Disability Insurance (SSDI), for example, does not require limited resources. It DOES require a disability that prevents the recipient from earning a significant income. But investment income and accumulated assets do not prevent receiving benefits.
Same thing for Medicare. It is not means-tested, and so assets and income do not affect eligibility.
On the other hand, there are at least two reasons why someone receiving Medicare and Social Security Disability payments might still be better served by having a trust:
- Depending on the person’s disability, they might need to have someone else manage the assets. That’s not a public benefits issue, but one of protection for some people with disabilities.
- People receiving benefits from SSDI and Medicare might also receive means-tested benefits. And they might not even realize it.
A special needs trust can pay for anything the trustee wants
Nope. This myth is especially dangerous for the trustee of a self-settled special needs trust. Depending on state law, the terms of the trust and the particular benefits the beneficiary is receiving, there might be absolute prohibitions on paying for some kinds of things.
One big limitation: the trustee of a special needs trust (either type) should almost never give cash to the beneficiary. It might be absolutely prohibited, but it will almost always be a really bad idea. And the same goes for things that can be turned into cash — like gift cards, or (most) prepaid debit cards.
Payments from the trust should be primarily for the benefit of the beneficiary. That will usually rule out making gifts to others — even if the beneficiary really, really wants those gifts to be made. Even nominal gifts (like birthday presents, for example) can get the trustee in trouble.
And the trustee has to recognize that there are all sorts of possible effects from some kinds of payments. Paying the beneficiary’s utilities, for example, might not be prohibited. But it might reduce the amount of Supplemental Security Income (SSI) the beneficiary receives.
The trust can only pay for disability-related expenses
The flip side is no more true than the previous myth. There are different rules for third-party and self-settled special needs trusts. But one of the more common myths about special needs trusts would have the trustee limiting payments to caretakers and supplies related to the disability.
In fact, a key value of a special needs trust might be the availability of entertainment, travel (and transportation), education, socialization and the like. The trustee of a special needs trust should strive to improve the beneficiary’s quality of life as much as possible.
The trust’s assets all eventually go back to the government
Like the most persistent myths, there is an element of truth in this one. But it requires a little clarification.
Self-settled special needs trusts do have to go back to repay state Medicaid expenditures at the death of the beneficiary. SSI and other government benefits do not have to be repaid. And third-party trusts do not have any pay-back requirement at all.
So who gets the money if there is no payback (or if the state’s claim does not consume the entire trust)? It depends. Mostly, it depends on the language of the trust document. And the beneficiary might have had the power to make a will changing the distribution terms.
…and our favorite myth about special needs trusts is:
That they cost a lot of money to set up and operate. Well, they might cost some money. But if you don’t create a trust, the beneficiary might lose benefits for several months while working out what to do. And at the end of that time, they might end up — you guessed it! They might end up establishing a special needs trust, and in less favorable terms.
So if the loss of benefits is just a few months while the beneficiary sorts out the options, that might well be more than the cost of advance planning. And yes, the continuing administration of a special needs trust might cost some money — but it’s usually a small price to pay for the personal and financial protection afforded to the beneficiary.
