Three things to consider when setting up a special needs trust

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To help a disabled loved one get the care they need, a trust specifically designed to address “special needs” can help streamline your estate planning—but you should consider these key issues when setting up the trust.
Government benefits eligibility
You should first consider the nature and severity of your loved one’s disability and whether they have potential to be self-sufficient. For example, a mildly disabled person who cannot be self-sufficient and is ineligible for government disability will likely need long-term living arrangements. This may require assisting with housing expenses and other needs. On the other hand, you may need to develop a different strategy for a severely disabled person who may be able to count on some level of government assistance.
If your loved one is or will be eligible for government assistance or benefits, it’s important to know whether eligibility is “need-based” or solely determined on their disability. To be eligible for need-based programs, such as Supplemental Security Income (SSI) and Medicaid, the disabled person’s assets will be taken into account. The general rule is that the applicant cannot have more than $2,000 in assets—so, if they directly inherit more than $2,000, the inheritance will stop the government assistance. With special planning, you may structure an inheritance so that the money is not “counted” as belonging to the beneficiary for aid eligibility purposes.
The structure of the trust
To prevent trust assets from counting toward government benefits eligibility, consider structuring the trust so the beneficiary can’t receive payment on demand. The beneficiary’s distributions could be left entirely to the trustee’s discretion or the trust may have guidelines authorizing certain expenditures (like medical treatments, advocacy services, residential repairs and maintenance, etc.) and prohibiting others. For example, the trust may allow distributions for education or personal care items, while disallowing use for basic needs such as food and shelter, since those can be met by other programs.
As long as the trustee is given absolute discretion, the assets should not be considered to be owned by the disabled person and will not be used when determining the beneficiary’s eligibility to receive government benefits.
Ways to fund the trust
When creating or updating an estate plan, consider how much money to put into the special needs trust and which assets you want to use. Some assets, like retirement accounts, may not work for this purpose. If the required minimum distributions are received directly by your loved one, he or she may become ineligible for certain programs. Distributions accumulated within the trust would be subject to income tax at a highly compressed trust tax rate. Be sure to speak with your tax advisor about your specific situation.
Many families find that a second-to-die life insurance policy, which provides benefits to heirs after both spouses have died, is the most efficient option to fund a special needs trust. With premiums that are often lower than single-life policies, the policy funds the trust after both parents have passed away, when it is most needed. Consider naming one or more contingent special needs trust beneficiaries so that the assets will not inadvertently pass to the disabled person’s estate upon his or her death.
Take the next step
To establish a plan to care for a disabled loved one when you are no longer able to, you should work with a qualified estate-planning attorney who is familiar with this specialized area. With detailed information, those involved in the planning can more realistically evaluate the capabilities of a disabled loved one, help the family estimate the loved one’s future financial requirements and personal needs, and make sure that the appropriate documents are set in place.
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This article is for general informational purposes only. It is not intended to be used, and cannot be used, as a substitute for specific individualized legal or tax advice. Tax and other laws are subject to change, either prospectively or retroactively.

The TIAA group of companies does not provide tax or legal advice. You should consult with your personal tax and legal advisors regarding your specific situation. Examples included in this article, if any, are hypothetical and for illustrative purposes only.

Advisory services provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.

This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.
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