A special needs trust can help provide financial support for a person with disabilities while preserving access to important means-tested benefits such as Medicaid or Supplemental Security Income (SSI). But the trust has to be created, funded, and administered correctly.
Some mistakes may not technically “invalidate” the trust. Instead, they can cause trust assets to be counted as the beneficiary's resources, affect public benefits, or prevent the trust from accomplishing what the family intended.
At Dillman & Owen Estate and Elder Law, our Indiana special needs trust planning lawyers help families create plans that support a loved one without overlooking the rules surrounding government benefits.
Here are some of the most important mistakes to avoid.
Mistake #1: Using the Wrong Type of Special Needs Trust
Not all special needs trusts work the same way.
A third-party special needs trust is generally funded with assets belonging to someone other than the beneficiary, such as a parent or grandparent.
A first-party special needs trust contains the beneficiary's own assets. Federal and Indiana Medicaid rules impose specific requirements on these trusts, including requirements concerning the beneficiary's disability, age, use of the funds, and repayment to Medicaid after the beneficiary's death.
Using the wrong structure can have significant consequences for eligibility.
Mistake #2: Giving the Beneficiary Too Much Control
One purpose of a special needs trust is to keep trust assets from being treated as resources that are freely available to the beneficiary.
If the trust is written so that the beneficiary can simply withdraw funds whenever they want, those assets may be treated differently for SSI or Medicaid purposes.
The language of the trust should carefully define who controls distributions and how those funds may be used.
Mistake #3: Choosing a Trustee Who Does Not Understand Benefit Rules
A trustee does more than invest money and pay bills. They also need to understand how distributions may affect public benefits. For example, Indiana Medicaid recognizes that some payments made directly for a beneficiary's benefit may be treated differently depending on what the trust pays for. Payments for medical expenses can receive different treatment from payments for rent or utilities. A well-drafted trust can still create problems if it is administered incorrectly.
The trustee should be someone who is responsible, organized, and willing to seek professional guidance when necessary.
Mistake #4: Leaving Assets Directly to the Beneficiary
Families sometimes create a special needs trust but fail to coordinate the rest of their estate plan with it.
A parent may name the trust in a will, for example, but still list the child personally as the beneficiary of a life insurance policy or financial account.
That direct inheritance could increase the beneficiary's countable resources and potentially affect means-tested benefits.
Wills, trusts, retirement accounts, insurance policies, and other beneficiary designations should all be reviewed together.
Mistake #5: Assuming the Trust Can Pay for Anything Without Consequences
Special needs trusts can provide a great deal of flexibility, but distributions still require care.
Trust funds may be used to improve a beneficiary's quality of life and pay for goods and services that public benefits do not fully provide. However, certain distributions can count as income or otherwise affect SSI benefits. The Social Security Administration specifically evaluates both trust assets and trust distributions when determining eligibility.
That does not mean the trust can never help with those expenses. It means the trustee should understand the potential consequences before making a distribution.
Mistake #6: Creating the Trust but Never Funding It
A perfectly drafted special needs trust cannot help your loved one if no assets ever reach it.
Families should think about how the trust will be funded. That could include an inheritance, life insurance proceeds, investment accounts, or other property.
Funding decisions should also be coordinated with the overall estate plan so assets do not unintentionally pass directly to the beneficiary.
Mistake #7: Treating the Plan as Finished Forever
Families change. Financial circumstances change. Public-benefit rules can change too.
A special needs plan created years ago should be reviewed periodically, particularly after a death, inheritance, significant change in assets, or major change in the beneficiary's needs.
Protect the Support You Want to Provide With Advisement From Our Elder Law and Estate Planning Attorneys
Special needs planning is about more than setting money aside. The goal is to provide additional support without unintentionally interfering with the benefits and services your loved one depends on.
Dillman & Owen Estate and Elder Law helps Indiana families coordinate special needs trusts with estate planning, Medicaid planning, and long-term care considerations.
If you are creating a special needs trust or want to review an existing one, schedule a consultation with our Indiana special needs trust planning lawyers. We can help you build a plan designed to provide meaningful support for years to come.
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