Trusts: Securing the Financial Future for Special Needs Adults

by Judy Dahl

Joe Peterson is a special needs adult living on his own in Santa Clara, Calif. He has to watch his spending carefully since, for more than a year, his government benefits--Social Security, medical insurance, inhome care--were cut off. Not only that, his mother had to repay the government for a couple of years' benefits that he previously received.

If Joe's mother had received better legal advice she could have prevented this from happening. How? She could have set up a trust, a legal financial arrangement that can allow special needs adults to meet basic needs using government benefits while also receiving financial assistance from other sources.

There are several types of trusts, each of which fits different situations, but all are designed to help people manage assets. Joseph Lipscomb, certified financial planner^TM, trust relationship officer at Navy Federal Financial Group/MEMBERS Trust Companyin Virginia Beach, Va., explains it this way: "A grantor, the person setting up the trust, transfers assets to a trustee. The trustee manages the assets for the benefit of someone--it could be the grantor, another person, or an organization."

For example, parents may want to sell an asset, like a second home, to benefit their special needs child. They could transfer the proceeds of the sale to a trust, sign an agreement specifying how the money would be used, and name a trustee to carry out their instructions. The parents no longer would own or control the asset (the money from the sale), nor would the child--the trust would control it.

The type of trust that could have helped Joe is called a special needs trust. This type of trust is designed to preserve special needs adults' government benefits, even if other assets--the funds in the trust--are used on their behalf.

Joe's situation

How did Joe get into this situation? The law says that once special needs children turn 18, if they have more than $2,000 in assets or more than $564 in monthly income they're disqualified from receiving government benefits.

Joe was seriously injured as an infant and received a sizable financial settlement. His mother, acting on an attorney's advice, put the money in a mutual fund. "I thought that if he didn't have direct access to it, it would be fine," says Mary Ellen Peterson. The fund wasn't in Joe's name, but it was tied to his Social Security number.

When Joe turned 18, it took the Social Security Administration several years to notice that he was receiving money from the mutual fund. But when it did, it cut off benefits, demanded repayment of those that had been disbursed, and required Joe to spend his entire settlement before benefits could be restored.

Joe's benefits are now restored--at a lower level--but money is tight. Social Security pays him only $612 a month for food, shelter, clothing, and transportation. That's not much, especially with the high cost of living in Santa Clara, and Joe has little income to supplement his benefits.

Funds in a properly constructed special needs trust are not considered an "available resource" for Social Security purposes, and do not disqualify the recipient from receiving benefits. Legally, the recipient can use government benefits to pay living expenses, and funds from the trust can pay for other expenses.

Get appropriate legal advice

The words "properly constructed" are the key. A trust is governed by a legal document--the trust document--that spells out what the trust is designed to do, what assets it controls, who manages the assets, who benefits (the beneficiary), and how he or she benefits.

The laws covering special needs trusts are very complex and specific, and change frequently. If a trust document isn't written to comply with all aspects of the law--and updated regularly--the trust won't accomplish its purpose. The assets it manages may be considered available resources to the beneficiary, who then might be disqualified from receiving government benefits.

This means it's critical to get excellent legal advice. "You really need to work with an attorney that's specialized and very experienced in this area," says Lipscomb.

"Consult more than one attorney if you're in any doubt," adds Peterson. "I ended up getting a Social Security attorney, but it was too late by then."

"The laws are always changing, so it's really important to stay connected with a special needs trust attorney," says Trudy Holmes, chief development officer at Parents Helping Parents (a resource center for families with special needs children). Holmes' 20-year-old daughter, who lives in her own home with support staff, is protected by a special needs trust.

Don't give cash

It's also important that a trust not distribute money directly to beneficiaries. The money then becomes an available resource, and the beneficiaries could lose their government benefits. "Most trusts pay bills directly," says Lipscomb. "It might pay off a mortgage or pay directly for a vehicle."

"If you give your child money directly, like to help with rent, her benefits will be cut," says Holmes. "Our trust pays for medical costs not covered by insurance, and it allowed my daughter to come on a family vacation."

Is a special needs trust right for your child?

A special needs trust doesn't fit every situation. "If there's no chance the individuals will be eligible for government assistance, there's no reason to set up a trust for this reason; you can give money to them outright," says Lipscomb. "But if the beneficiary isn't competent to manage his or her affairs, you might still want to form a trust of another type."

For example, if you want to protect your child after your death, you can set up a testamentary trust. You specify how your assets will be managed and disbursed, and who (the trustee) will manage them. There are many other types of trusts that can manage assets during your lifetime or that take effect after your death.

Financial planners, such as those available at many credit unions, can help you decide what type of trust is right for you. Lipscomb's organization offers trust advice at no charge. "We help members do some of the legwork before they consult an attorney," he says. "We get members ready to sit with an attorney so they're educated, understand their options, and spend less time with the attorney--they'll pay lower legal fees."

Secure your child's future

"I set up our special needs trust to secure my daughter's future--to ensure that she would still qualify for government benefits and to divert resources to her," says Holmes. "If she had to live on just her benefits, it wouldn't leave much for additional health costs, let alone any extras like a special dress for a wedding."

"By the time your special needs child is 18, if he or she has any money at all, set up a special needs trust," concludes Peterson.

Ask at your credit union for help--credit union staff can provide advice or referrals about trusts, and even may be able to act as your trustee.

April 11, 2005