Greater awareness of disabilities in the last few decades has caused many of us to appreciate the need for special needs trusts. In most cases, the primary, essential purpose of a special needs trust is to improve the quality of life of an individual with special needs without disqualifying him or her from eligibility for public benefits.

A special needs trust is not uncomplicated and presents many administrative challenges. While they are like other trusts in many ways as the same general rules of law, taxation, and trust accounting apply, they are also unlike more familiar trusts in many other respects.

There are two types of special needs trusts. The first type is the self-settled special needs trust.

The Self-Settled Special Needs Trust

This is a type of trust established by the beneficiary or by someone acting on the beneficiary’s behalf with the beneficiary’s funds for the purpose of obtaining or maintaining eligibility for public benefits. The most common source of funds for a self-settled special needs trust is the proceeds from a lawsuit. The cause of action often arises from the accident that caused the disability. Another common source of funds that may require a person with a disability to establish a self-settled trust is a direct inheritance.

The primary test in determining whether a trust is self-settled is whether the beneficiary had the right to outright possession of the proceeds prior to any act establishing the trust. If so, public benefits eligibility rules will treat the trust as self-settled by the beneficiary although a court, family member, or lawyer representing the beneficiary executed the trust documents.

The following are some key points about self-settled special needs trusts:

• A self-settled special needs trust must include a term providing that, upon the death of the beneficiary, the cost of any Medicaid benefits received will be repaid to the state Medicaid agency.
• A self-settled special needs trust may have significant limitations on the kinds of payments the trustee can make.
• A self-settled special needs trust generally requires annual accounting to the state Medicaid agency of trust expenditures.
• If not managed properly, a self-settled special needs trust may cause the beneficiary to be deemed as having access to trust assets and income, thus costing the beneficiary eligibility for Supplemental Security Income and Medicaid.
• A self-settled special needs trust will be taxed as if its contents belong to the beneficiary. like a “grantor” trust.

When set up properly, a special needs trust can serve as an effective property management tool that can

• protect trust assets from loss or exploitation.
• maximize eligibility for means-tested government benefits
• pay for essential support services to insure the beneficiary’s quality of life

Rubin Law is a law firm solely dedicated to enhancing the lives of children and adults with intellectual disabilities, developmental disabilities, and mental illnesses. Rubin Law is the only law firm in Illinois that limits its practice to providing legal services and future planning for adults and children with special needs. We offer patience, compassion, and a special understanding to those with disabilities and those who care for them. For more information, email us at email@rubinlaw.com or call 866-TO-RUBIN.