Building Your Assets and Wealth

Trust Funds

A trust is a legal arrangement in which a person or organization manages assets for someone else. The trust's assets can then be used to make payments for that person's expenses. The person whose expenses are paid for by a trust is called the “beneficiary” and the person or organization who is managing the assets is the “trustee.” Many kinds of assets can be put into a trust, such as cash, stocks, bonds, and real estate.

Some kinds of trusts, called Special Needs Trusts, can be set up to hold assets for a person with a disability. When in a Special Needs Trust, the assets do not affect the person's eligibility for programs like Supplemental Security Income (SSI), Medicaid, and Section 8. That means that if you are the beneficiary of a Special Needs Trust, your trust can have more assets in it than the resource limits for benefits programs usually allow. This can let you be in a more secure financial situation without losing your benefits. For more details, see Social Security's information about Special Needs Trusts and SSI eligibility.

You or the person setting up the trust for you must do so correctly. If your Special Needs Trust is not set up correctly, the assets in your trust might be counted toward public benefits resource limits and you could lose your public benefits.

Special Needs Trust Rules

While public benefits, such as SSI, Medicaid, and HUD housing benefits, offer basic support for food, shelter, and medical care, a Special Needs Trust can be used to pay for other things. For example, money from the trust could be used to pay for your recreation expenses, telephone bill, education, and vacations. Money from a Special Needs Trust cannot be used for expenses that are already paid for by one of your public benefits.

Additionally, the funds in a Special Needs Trust must be used to benefit only you; no one else can benefit from that trust. That said, while the trust is set up to help you, payments should not be made directly to you. Payments made directly to you count as income and may affect your benefits. When you need to pay a provider for something that is not food or shelter, the trustee will pay the money from the trust directly to the provider. Only the trustee can handle the money from the trust.

First Party Special Needs Trusts, Pooled Special Needs Trusts, and Third Party Special Needs Trusts are three common types of trust. They each have their advantages and disadvantages and the right type for you depends on your specific circumstances.

Get advice before setting up a trust

Trusts are complicated. Contact an attorney who specializes in them so that you can get advice about which type of trust is right for you and how to set it up. If you don't do things right, you could have serious problems.

The Special Needs Alliance can help you find an attorney who specializes in Special Needs Trusts.

First Party Special Needs Trusts (Medicaid Payback Trusts)

First Party Special Needs Trusts, often called Medicaid Payback Trusts, are used if you have accumulated assets, inherited assets, or gotten assets from a court settlement. In these situations, you actually own the money.

It used to be that people with disabilities were not allowed to set up their own First Party Special Needs Trust, even though it was their own money. A parent, grandparent, guardian, or court had to set up the trust, the trustee controlled the funds, and you could not be your own trustee. The laws changed in 2016, and this type of trust can now be set up by you, or by your parent, grandparent, legal guardian, or the court.

To qualify, you must be under 65 years old and must have a disability as defined by Social Security. If you do not meet Social Security’s definition of disability, you cannot have this type of trust.

The trust has to specify that after you die, any money left in the trust will be used to pay back the state for the amount of money it spent on Medicaid for you after the trust was set up. If money is still left over after the state has been paid, it can be given to whomever you tell the trustee you want it to be given.

Pooled Special Needs Trusts

This type of trust pools assets from different people and puts them into a large investment fund. Although the funds are pooled (used together), you still have your own separate account. Pooled Trusts offer both First Party accounts (funded with only your own money) and Third Party accounts (funded only with money from other people). As with a First Party Special Needs Trust, all beneficiaries of a Pooled Special Needs Trust must have a disability that meets Social Security's standards.

A Pooled Special Needs Trust is set up through a nonprofit organization. The nonprofit organization will administer the Pooled Special Needs Trust, take care of all the tax preparation, make investment decisions, and act as the trustee.

Before the Pooled Special Needs Trust is set up, you or your family members must explain what you want the trust to pay for and who should be consulted about these matters. Anyone can put money into the Pooled Special Needs Trust for you — parents, grandparents, even you.

Any money left in the Pooled Special Needs Trust after you die will be used to pay back the state for the amount of money it spent on Medicaid for you after the trust was set up.

Third Party Trusts

Third party trusts are often similar to Special Needs Trusts and sometimes are called Third Party Special Needs Trusts, even though there are differences. Third Party Special Needs Trusts are not as well known as First Party Trusts and Pooled Trusts, but they have the advantage that after you die, a Third Party Special Needs Trust does not need to repay the government for any Medicaid expenses.

Only certain people are allowed to set up a Third Party Special Needs Trust:

  • Your parent
  • Your grandparent
  • Your legal guardian
  • The court

Parents usually set up and supply the money for Third Party Special Needs Trusts, often through their wills and sometimes by purchasing life insurance payable to the trust. These types of trusts are often established for a child with a disability, but they can also be set up for a child (or other person) without a disability. A parent can set up a trust for a child of any age, from a baby up to a senior. For example, a mother who is 90 years old could set up a trust for her 65-year-old daughter.

Other family members, such as grandparents, aunts, and uncles, can also put money into this type of trust. The only person who cannot place money into this type of trust is you, the person who will be the beneficiary of the trust.

Some parents place their property in a "living" trust and leave instructions that a separate trust will be created for their child upon their death. This type of trust is often effective immediately. Anyone can give money to the trust by either writing a check or writing a will naming the trust as the beneficiary.

If you get SSI, the money from a Third Party Special Needs Trust should not be used for housing or food. Housing and food are considered "basic needs" under Social Security laws. If you are getting free housing or food from someone else, including a family member or a trust, then your SSI benefits will be reduced or stopped.

If you get Medicaid or Food Assistance, free housing or food, including payments for those items from a trust, are not considered income and will not affect your benefits eligibility, though it could lower the amount you get in Food Assistance.

When creating a Third Party Special Needs Trust, whoever sets up the trust must decide who will get any assets that are left in the trust after you die.

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