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What you need to know about a special needs trust

Disabilities can create many financial difficulties, such as the inability to work and the need for long-term treatments, caregivers and medical devices such as customized wheelchairs. Fortunately, there are government programs that assist families and individuals with these expenses. Unfortunately, there is typically an income limit to qualify for assistance. Many people establish a special needs trust to meet eligibility requirements without reducing their assets.

What it is

A special needs trust is an entity separate from the person who creates it. The creator of the trust transfers money and assets into it so the trust becomes the owner of the assets rather than the individual.

What it does

Once assets belong to the trust, they no longer count toward a person’s overall net worth and prevent him or her from qualifying for federal assistance such as Medicaid. The trustee typically provides funds to the individual or caregiver for basic needs such as food, clothing and other essentials, but may pay for larger items directly from the trust rather than transfer the money to the individual as income.

Who can set one up

A parent or grandparent, a guardian or the court may set up a third-party special needs trust. However, the person who typically creates this type of trust is a parent with a disabled child. The parent often also designates himself or herself as the trustee during the child’s lifetime. The trustee could also be another family member, a friend, a couple or a professional administrator.

Often, people with disabilities are able to manage financial matters without assistance, but until Dec. 16, 2016, they could not set up their own special needs trust. The Special Needs Trust Fairness Act corrected that situation so that anyone with a disability who is mentally competent and between the ages of 18 and 65 can set up a first party special needs trust.