If you have an adult child with special needs, you might spend some sleepless nights worrying about how your child will be taken care of financially. A person with special needs may not be able to fully understand their finances and how they relate to their needs. Some parents find the answer to these concerns about their adult child’s financial future is executing a special needs trust.
What is a special needs trust?
A special needs trust allows the adult to receive the funds they need for their everyday care, but it puts someone else in charge of managing and distributing those funds.
Special needs adults often depend on government benefits such as SSI and Medicaid to afford the care they need in their everyday lives, which can be very expensive. However, these benefits are only available to those with a very limited income. Money in a special needs trust is not counted as income for these purposes.
Most special needs trusts are either third-party trusts or first-party trusts
A third-party trust is funded with money coming from a third party, such as a special needs adult’s parents, rather than money obtained or earned by the individual themselves. These funds are never placed in the adult’s name. Once the third party passes away, these funds go to someone who is not the special needs adult. Third-party trusts are overseen by a trustee who is not the special needs adult.
Third-party trusts can pay for items not covered by government benefits. For example, a third-party trust can be used to pay for clothing, transportation costs and other expenses government benefits do not apply to.
A first-party trust is funded with money coming from the special needs adult’s own income and inheritances. It is meant to avoid exceeding income limits placed on government benefits. It is overseen by a third-party trustee who has the right to distribute trust funds. Funds that remain in a first-party trust after the individual passes away generally are used to pay back Medicaid expenses.
Planning for the future
Special needs trusts, whether they are third-party trusts or first-party trusts, can be the key to ensuring your adult special needs child has the finances they need to pay for the many expenses they will need throughout their life.