Under Texas law, a special needs trust is a trust that allows a person with a disability to have money put aside for their care. Additionally, the special needs trust still allows the person with a disability to be eligible for all the government benefits that they are entitled to.
There are three different types of special needs trusts that we talk about in our workshops for special needs planning. The first one is a third-party special needs trust. We encourage every parent to put in place a third-party special needs trust as soon as they know that their child has a disability. Once a special needs trust is in place, it allows other family members such as grandparents, aunts, and uncles to contribute to that trust. With a third-party trust, the person that sets it up, usually the parent or grandparent, has the ability to say where the money goes if the beneficiary dies before the trust is empty or all the money runs out.
In a first-party trust, a beneficiary receives money outright, and they lose their government benefits if they don’t put it into a special needs trust. Furthermore, a first-party trust has payback provisions, which means that the federal government or Medicaid is going to get paid back for everything they spent on the beneficiary before the money goes to other beneficiaries.
A pooled trust is the third alternative. We use a pooled trust when there are small amounts of money for people that 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. The Arc of Texas manages small amounts of money, and accounting wise, it is all segregated. It is basically an account that is used as if it was a special needs 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. You may need to appoint temporary health care agents in case somebody else needs to take the child to the doctor. Also, HIPAA authorizations, which allow someone to access medical records if necessary for a child, are done for children with disabilities.
Most of the time, a special needs trust will protect your loved ones’ assets from creditors. A special needs trust is set up so that the trustee has discretion on how the money is spent. There are also some very strict guidelines on what the trustee can use the money for. If the beneficiary is on Social Security SSI, then SSI must be used first before the money and the trust can be used. It is also designed to keep certain creditors from getting money from the trust. Thus, it does give the beneficiary some asset protection, and it gives them the ability to enhance their life above and beyond what SSI pays.
A special needs trust is specifically designed to hold money for the benefit of the beneficiary. The amount doesn’t matter. Accordingly, they are still eligible for government benefits. In our workshops, we tell people that you can have a million dollars in a special needs trust, and that child will still be eligible for government benefits as long as the planning was done correctly to avoid any problems.
There is one difference between a supplemental trust and a special needs trust. A supplemental needs trust is put in place to supplement government benefits. In a traditional special needs trust, you can supplant the government benefits so that the beneficiary can spend their inheritance on things that could otherwise get them to lose some of their government benefits. Usually, it is possible to do both. We want trustees to have options, and we to make sure that the beneficiary has the best quality of life that can be given to them.
We tell every client to set up a special needs trust as soon as they know that their child has a disability. We want to set it up early because their estate plan is going to differ when they have a special needs trust. We do not want the child to accidentally inherit outright. If we set the special needs trust for while the parents are still alive, it gives the child’s grandparents the ability to update the estate plan in case the child’s parents predeceased them. Therefore, the grandparent’s plan will work correctly as well. When discussing the possibility of a special needs trust, it is important to keep in mind that a standalone special needs trust can protect your child in ways that a will cannot. A simple will does not include the estate planning tools necessary to ensure your child has the best protection possible.
A special needs trust is funded by two different methods. Usually, when we set up a third-party trust, we have the parents open a small savings account in the name of the trust and put small amounts of money in it periodically every year over time. You can also fund a special needs trust by beneficiary designation. For instance, the parents could leave something to a child specifically by leaving it to the trustee of the child’s special needs trust. Like all trusts, there are two methods of funding: putting assets into the trusts now or putting assets into the trust upon death.
If your child has a disability, only a special needs trust will protect them and allow them to continue to receive government benefits. If your child does not have a disability, then you can use other types of trusts. Only a special needs trust works for children or adults with disabilities to allow them to maintain government benefits, and still give them the best quality of life possible.
For more information on Special Needs Trusts In Texas, call us or schedule a strategy session online here!
Kimberly Hegwood is the Managing Attorney of Your Legacy Legal Care, a Houston estate planning law firm. With more than 25 years of experience practicing law in Texas, she represents clients in a wide range of legal matters, including elder law, asset protection, estate planning, Medicaid crisis planning, probate, guardianship, and other estate planning practice areas.
Kimberly received her Juris Doctor from the South Texas College of Law and is a member of the State Bar of Texas.
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