Special Needs Trusts
A New Mexico special needs trust (often referred to as a supplemental needs trust) is a special type of trust designed for individuals with a disability who are receiving government aid, such as Medicaid or Social Security benefits. The idea of the trust is to provide for the disabled individual (the “beneficiary”) but in such a manner that will not affect their ability to continue to receive these benefits (as some are income based, like housing subsidies, or Medicaid). The special needs trust is supposed to provide for care which is not covered through government benefits.
The assets that form the trust are not counted in the individual’s income for purposes of benefit determination. As long as the beneficiary of the trust does not have much in terms of personal assets (less than $2,000), they will qualify for government aid, and a properly drafted special needs trust will be able to provide supplemental income that will not affect those benefits.
Congress blessed the use of special needs trust with the passage of the Omnibus Budget and Reconciliation Act of 1993, which allowed creation of this special type of trust for people that are considered disabled under Social Security guidelines (which is based on one’s inability to work; it requires that you cannot work due to your medical condition, and that the condition has lasted or will last more than one year). Congress does, however, require that the trust be irrevocable (though a trust will usually provide for situations where the trust will be dissolved or terminated). An experienced estate planning lawyer will draft the trust in such a manner as to qualify.
Typically a special needs trust is created by a parent for their disabled child. Congress allows the trust to provide for “supplemental and extra care, over and above what the government provides.” This essentially means that whatever care the government does not provide, the trust will. Even if the family creating the special needs trust has adequate resources for the child’s use; a special needs trust can be used to protect the child’s assets in the event the child is sued. The trust is not subject to claims from the child’s creditors, including a court judgment.
Special needs trusts are usually formed for a beneficiary that is receiving government aid and is created either by a will or a trust declaration document. A special needs trust is used because leaving a beneficiary assets through a will alone could make the beneficiary ineligible to receive government assistance. A special needs trust is better than having an informal relationship that amounts to a third party acting as a trustee for the beneficiary (typically seen when a will leaves property to one person for the benefit of someone else, like a brother for the care of his sister). In such informal relationships the third party is not protected from creditor’s claims.
It is important that the person creating the trust realize what constitutes “supplemental and extra care, over and above what the government provides.” Generally, disallowed items are those items that are considered food, housing, and health; there do exist exceptions to the general rule however, for example trust funds can be used for vacation and entertainment.
Interestingly enough, a special needs trust is also its own legal entity. The trust is not registered under the Social Security Number of the beneficiary but rather it receives its own unique federal tax identification number. Complexities such as this highlight the importance of using an estate planning attorney to prepare the special needs trust.