When families in Texas face the reality of caring for a loved one with special needs, the financial challenges can feel overwhelming. How do you provide for your child or family member while protecting their eligibility for essential government benefits like Supplemental Security Income and Medicaid? The answer lies in understanding special needs trusts and working with a qualified trust attorney in Fort Worth, TX families rely on for guidance.
If you leave assets directly to your child with special needs, either in a will or through intestacy laws, the inheritance may jeopardize your child’s ability to receive benefits under government programs such as SSI and Medicaid. A special needs trust can help preserve your child’s eligibility for public benefits while providing for supplemental needs that will enhance their life.
What Is a Special Needs Trust?
A special needs trust is a discretionary trust that holds the property of a disabled beneficiary and directs distributions to the beneficiary in a manner that preserves their eligibility for public benefits. Unlike other types of trusts, special needs trusts are specifically designed to supplement government benefits, rather than replace them.
Special needs trusts permit distributions from trust funds to supplement, not replace, a beneficiary’s government entitlements. To maintain eligibility for needs-based support, the beneficiary cannot have control over the assets in the trust. This careful structure ensures that the trust assets remain separate from the beneficiary’s countable resources for purposes of benefit eligibility.
How Special Needs Trusts Differ from Other Trusts
Not all trusts will work to preserve a disabled beneficiary’s benefits. Support trusts, which direct distributions for the health, welfare, and support of a beneficiary, can disqualify a disabled beneficiary because the assets in a support trust are counted as the beneficiary’s resources.
The key distinction lies in the discretionary nature of special needs trusts. The trustee has complete discretion regarding the distributions to be made for the beneficiary. This discretion is crucial for maintaining eligibility for benefits.
Types of Special Needs Trusts in Texas
Texas law recognizes several types of special needs trusts, each serving different circumstances and funding sources.
First-Party Special Needs Trusts
A first-party special needs trust, also referred to as a “self-settled” or “(d)(4)(A) trust,” is funded with assets or income that belong to an individual with a disability. For the assets of this type of trust not to count for Medicaid or SSI purposes, federal law requires that the beneficiary must be under the age of 65 when the trust is created and funded.
A special needs trust is a revocable or irrevocable trust established with the assets, including income or resources, of a person under 65 who meets the SSI program’s disability criteria. The trust must be established for the person’s benefit by a parent, grandparent, legal guardian, court or the person.
Important requirements for first-party trusts include:
– The trust must include a provision that the state is designated as the residuary beneficiary to receive, at the person’s death, funds remaining in the trust equal to the total amount of Medicaid paid on their behalf
– The beneficiary must meet SSI disability criteria
– The trust must be irrevocable
Third-Party Special Needs Trusts
A third-party special needs trust, also known as a supplemental needs trust, is funded with assets belonging to someone other than the beneficiary. These trusts offer more flexibility than first-party trusts.
In Texas, there are no special statutory requirements for a special needs trust. Additionally, there is no age or repayment requirement for creating a third-party trust. This makes third-party trusts an attractive option for parents and grandparents planning for their loved ones with disabilities.
Pooled Trusts
A pooled trust is an irrevocable trust containing the assets of a person who meets SSI’s definition of disability. A pooled trust must be established and managed by a non-profit association. A separate account is maintained for each beneficiary, although the accounts may be pooled for investment and management purposes.
Pooled trusts are used when there are small amounts of money for people who are under the age of 65. For instance, if the beneficiary just inherited $25,000, a pooled trust can be applicable because they do not need a full-blown special needs trust. In Texas, we have the Arc of Texas as a pooled trust.
Texas Requirements for Special Needs Trusts
Understanding the specific requirements under Texas law helps ensure your trust meets all necessary criteria for protecting benefits.
Disability Requirements
If a person is receiving disability benefits from SSI, Retirement, Survivors, and Disability Insurance (RSDI) or Railroad Retirement (RR), their disability is automatically established. Verify that the SSI, RSDI or RR benefit is a disability benefit. Otherwise, disability must be established.
Age Restrictions
The trust exception continues even after a person turns 65 if they continue to meet the disability criteria for the SSI program. However, additions or augmentations to the trust after the person turns 65 are a transfer of assets.
Legal Review Requirements
A legal review of the instrument, device or arrangement that establishes the special needs trust is necessary. Send the special needs trust documents to legal staff following established procedures.
Permitted Distributions from Special Needs Trusts
Understanding what a special needs trust can and cannot pay for is crucial to maintaining benefit eligibility.
Allowable Expenses
A special needs trust can pay for various expenses without affecting the beneficiary’s eligibility for government benefits, such as SSI or Medicaid. The following list of generally permissible distributions from a special needs trust, which will not reduce or eliminate SSI, is not exhaustive.
Common permitted distributions include:
– Computer hardware, software, programs, and Internet service
– Home improvements, repairs, and maintenance (not covered by Medicaid)
– Clubs and club dues (sports clubs, book clubs, health clubs, service clubs, zoo, advocacy groups, museums)
– Therapy, medical care, recreation, and travel
Restricted Distributions
Distributions for food or shelter (“in kind support and maintenance”) will result in a maximum reduction of about one-third in SSI. Additionally, a Special Needs Trust can’t cover cash payments or gift cards without affecting benefits.
Setting Up a Special Needs Trust in Texas
Creating an effective special needs trust requires careful planning and professional guidance from a qualified trust attorney in Fort Worth, TX, whom residents trust.
Choosing the Right Type of Trust
A stand-alone special needs trust is a trust that goes into effect immediately. This type of trust is beneficial if you want to start transferring funds to the trust immediately. It is also useful when multiple family members or friends want a vehicle to which they can contribute during their life or after their death.
Selecting a Trustee
You must pick a trustee who has knowledge of Texas trust laws and uses discretion when distributing trust funds in order not to affect your loved one negatively. The trustee plays a critical role in the trust’s success.
A trustee is the person or entity who manages the trust assets and administers the trust provisions. A trustee can be a family member, friend, or colleague of the beneficiary, a professional, or a combination of the two. A professional trustee generally is a corporate trust department or an attorney.
Funding the Trust
While a special needs trust is used for a specific purpose, it can hold a variety of assets. Assets that are commonly placed in a trust include: bonds, stock, real estate, mutual funds, and life insurance proceeds.
Tax Implications of Special Needs Trusts
Understanding the tax consequences helps families plan more effectively for their loved ones’ futures.
Gift Tax Considerations
The annual gift tax exclusion, currently $17,000 per beneficiary per year (as of 2024), allows grantors to transfer assets into the trust without incurring gift tax liabilities.
Trust Tax Filing Requirements
For non-grantor trusts, trustees are required to complete IRS Form 1041, the U.S. Income Tax Return for Estates and Trusts. This form reports the trust’s income, deductions, and tax liability.
Special Needs Trusts vs. ABLE Accounts
Families often wonder whether a special needs trust or an ABLE account better serves their needs.
ABLE Account Limitations
ABLE accounts are capped at $18,000 annually, with a total savings limit of $100,000. For now, ABLE accounts are only available to people who became disabled before age 26.
Special Needs Trust Advantages
Special needs trusts have no set contribution or savings limits but have tighter controls. This is in contrast to special needs trusts, which have no age restrictions.
A Special Needs Trust is better for long-term planning with no savings limits.
Working with Estate Planning Professionals
Creating a special needs trust requires specialized knowledge of both federal and state laws. Unless you plan on signing a Joinder Agreement to establish a Master Pooled Trust sub-account with an organization like the Arc of Texas, I would recommend you engage an attorney to advise you and draft the trust document. Even those planning to sign a joinder agreement would benefit from the advice of an attorney.
When selecting legal counsel, look for attorneys who understand the complexities of special needs planning and have experience with Texas-specific requirements. DFW Estate Planner helps families throughout the Dallas-Fort Worth area navigate these important decisions with compassion and expertise.
The Planning Process
The process typically involves:
1. Assessing your loved one’s current and future needs
2. Determining the appropriate type of trust
3. Selecting qualified trustees and successor trustees
4. Drafting the trust document with proper language
5. Establishing funding mechanisms
6. Creating ongoing administration procedures
Beyond the Trust: Comprehensive Special Needs Planning
Special needs planning extends beyond just creating a trust. When planning for a special needs trust, a designation of guardianship is also important to consider. Depending on where the successor guardian resides, a designation of temporary guardian may be created. A temporary guardian can care for the child until the permanent guardian arrives.
Families should also consider:
– Probate planning to ensure smooth administration
– Healthcare directives and medical decision-making authority
– Housing arrangements and long-term care planning
– Educational and vocational planning support
Common Mistakes to Avoid
Several pitfalls can undermine the effectiveness of a special needs trust:
- Improper drafting: A special-needs trust solves this dilemma, but the trust must be carefully constructed by a knowledgeable estate planning lawyer. If set up improperly, the federal government can either declare your loved one ineligible for Medicaid and SSI or demand to be paid back from your estate.
- Giving beneficiaries control: The beneficiary also cannot have the right to demand distributions of income or property from the special needs trust, name the Trustee or change the terms of the special needs trust.
- Using trust funds for prohibited purposes: Understanding distribution rules prevents benefit loss
- Failing to update the trust: Regular reviews ensure continued compliance with changing laws
Frequently Asked Questions
Can a special needs trust be created for someone not currently receiving benefits?
It is possible to create a supplemental needs trust for someone who is eligible for Medicaid and SSI, even though they are not currently receiving those benefits. This proactive approach protects future benefit eligibility should circumstances change.
What happens to trust assets when the beneficiary dies?
The answer depends on the type of trust. When the trust ends (usually upon the beneficiary’s death), the remainder beneficiaries are the individuals who will receive any remaining trust assets. In first-party special needs trusts, the state’s Medicaid division is typically the first remainder beneficiary. However, with a third-party trust, the person who sets it up, usually the parent or grandparent, can specify where the money goes if the beneficiary dies before the trust is fully depleted or all the money is exhausted.
How does a special needs trust affect income for benefit purposes?
Any distribution paid directly from a trust to the individual or to a third party for the benefit of the individual is unearned income to the individual in the month of receipt, except: payments for medical or social services for the trust beneficiary and fees to the trust beneficiary’s Achieving a Better Life Experience account. This is why proper trust administration is so important.
Can family members contribute to an existing special needs trust?
Once a special needs trust is in place, it allows other family members, such as grandparents, aunts, and uncles, to contribute to that trust. This makes special needs trusts an excellent vehicle for coordinated family planning.
Planning for a loved one with special needs requires careful consideration of complex legal and financial factors. By working with experienced professionals who understand Texas law and federal benefit programs, families can create comprehensive plans that provide security and peace of mind. If you are considering special needs planning for your family, contact DFW Estate Planner to schedule a consultation and explore your options.
This information is for educational purposes only and does not constitute legal advice. Each family’s situation is unique, and you should consult with a qualified attorney to discuss your specific circumstances.
