If the parent or guardian of a disabled person dies, but leaves an inheritance, receiving those assets can result in the disabled person losing their Medicaid or Social Security Benefits (SSI). This is where a special needs trust can help.
Colorado trust law allows parents and family members to set up a special needs trust in Colorado to hold gifts and inheritances for a disabled person. When these assets are held in a trust, for the benefit of a disabled person, Medicaid and SSI will not consider the assets when deciding if the disabled person qualifies for need-based government benefits. This is somewhat akin to how a Medicaid asset protection trust functions.
What is a Special Needs Trust?
A special needs trust is a specific type of discretionary trust. This structure makes the difference between a trust beneficiary who can enjoy a private room in a nursing facility, take a trip to visit family, hire a trusted family caregiver, purchase a car, take educational courses, and one who cannot afford such things.
A Colorado Special Needs Trust Has Three Fundamental Purposes
- To prevent a disabled person from losing valuable government benefits;
- To enable the disabled person to receive gifts and inheritances from others; and
- To improve the quality of his or her life by supplementing their basic needs.
Special Needs Trust Examples
Colorado trust law allows the trust to pay for items that will enhance the disabled person's standard of living. Examples of what a special needs trust may pay for include:
- Cell phones;
- Therapies that Medicaid won't cover;
- Cars; and
- Non-medical assistance.
A special needs trust also allows the person setting up the trust (usually a parent or guardian) to dictate who receives the remaining assets after the disabled person has passed away. Discover the other types of family trusts here.
Special Needs Trust Rules
Does a Special Needs Trust affect SSI? The answer is no, so long as the proper rules are followed. The principle is to draft an irrevocable discretionary trust overseen by a trustee. This, technically, makes the trust assets unavailable to the trust beneficiary in the eyes of the government. In other words, the trust beneficiary must have no power to direct the use of trust assets for his or her own support and maintenance. Those decisions are made by the trustee.
- The power and authority to direct trust assets rests with the trustee who has absolute and sole discretion in making distribution decisions. By doing so, the trust assets do not count against the beneficiary's financial eligibility for public benefits like Medicaid or SSI.
- The trust is irrevocable. After the trust has been created and funded, the assets cannot be returned to the creator.
- Distributions from the trust must be for the beneficiary's sole benefit. Trust law allows a special needs trust to enjoy the special status of being an exempt asset so long as its drafted for the benefit of the trust beneficiary only, and only during his or her lifetime. Thus, a special needs trust will not work as a tool for transferring wealth to multiple generations.
- Finally, the beneficiary of the trust must have a disability and be able to show proof of that disability. This proof of disability can be formal as determined by SSI and Medicaid or informal as per a physician's letter.
So long as these special needs trust rules are followed. a disabled person may qualify for need-based public benefits like Medicaid and SSI. Given the specif rules, and that the trust is irrevocable, we do not recommend do-it-yourself- special needs trusts. The stakes are simply too high to hope things were done correctly, rather than trusting an experienced Colorado trust attorney.
Special Needs Trust Examples
A special needs trust in Colorado may be setup in one of two ways:
- First-party Trusts; or
- Third-party Trusts
A first-party trust is funded with the trust beneficiary's own assets and is also referred to as a self-settled trust or pooled trust. A first-party trust can be created by the beneficiary themselves, his or her agent, a representative payee, or by court order.
Typical assets used to fund a first-party trust are:
- Personal injury settlements
- Maintenance payment in a divorce settlement
- A workers compensation award
- Back payment of public benefits
- Assets owned by the beneficiary
- Assigned income, such as from a public or state pension fund
A third-party trust is one that is funded by anyone other than the trust beneficiary. Assets that belong to the beneficiary cannot be put into a third party trust, because this would trigger a Medicaid payback after the beneficiary has passed away.
A third-party trust can be created by any third-party, but are typically created by a parent or grandparent, or an agent for a third party – usually a guardian or agent under a durable power of attorney.
Common examples of third-party trusts include:
- A special needs trust which is funded through the last will and testament of a parent or grandparent for the benefit of a disabled child or grandchild.
- A special needs trust created for the benefit of a disabled adult child by a parent during his or her lifetime, to enhance the disabled adult child's standard of living without endangering their eligibility for public benefits.
Third-party trusts are more flexible than first-party trusts and can be created as part of an overall estate plan. For example, a parent’s estate can create a testamentary trust and authorize the trustee to create and fund a special needs trust for the benefit of a disabled child.
Similarly, a parent can create a third-party trust now, include the proper language to fund the trust in his living trust, and then the trust will be funded at death.
Other advantages of third-party trusts are:
- More relaxed rules regarding who can benefit from the trust
- Certain tax benefits for the trust creator
- Options for the beneficiary to make annual gifts
Drafting a Trust
Special needs trusts can be complicated because they must be administered so as to strictly comply with the letter of the law. This is where an experienced estate planning attorney can help.
An experienced estate planning attorney will know how to administer a special needs trust so that the trust stays in strict compliance with Medicaid and SSI.
For more information or for help with setting up and administering a special needs trust, contact our qualified and experienced estate planning attorneys through the contact link on our website.