If you have an adult child who has a disability, you may be thinking about using your estate plan to improve his or her quality of life after your death. You must be careful with gifting your child money or other assets, though, as you may inadvertently render him or her ineligible for means-tested government benefits, like Supplemental Security Income or Medicaid.
According to AARP, parents who have children with disabilities often elect to form special needs trusts. This estate planning tool allows you to set aside money for the benefit of your child without jeopardizing financial support from government programs.
Why does a special needs trust preserve government benefits?
If you gift money or assets to your child, he or she may cross the income threshold necessary to qualify for government financial help. A special needs trust is not a gift, as it only holds funds for the benefit of your son or daughter. As a result, funds in the special needs trust typically do not count as income for purposes of qualifying for means-tested benefits.
What expenses can the trust cover?
To avoid problems with public benefits, your son or daughter may not use disbursements from the trust to pay for the same things government programs cover. Usually, this means payments for housing, utilities, food and basic medical care may not come from the special needs trust. Using disbursements to pay for supplemental matters, such as hobbies, education, home improvements and out-of-pocket medical care, is generally acceptable, however.
When you set up a special needs trust, you choose a competent trustee to manage it. Ultimately, the trustee’s familiarity with government programs and acceptable disbursements ensures your child does not lose valuable public benefits.