Special Needs Trusts

April 10, 2023

What they are and how they can help you

In order to qualify for government benefits like SSI and/or Medicaid as a result of having a disability that prevents you from being able to work, there are specific income limit rules (depending on what state you live to qualify for government benefits. Keep in mind a person can only use a Special Needs Trust if they are disabled AND unable to work.

Supplemental Security Income (SSI) and Medicaid only cover basic needs, and they have complex rules. If your family or friends give you money directly for anything, such as a phone, laptop it will result in a dollar-for-dollar reduction in your SSI benefits. In addition, if you are provided money that exceeds your monthly SSI amount, your Medicaid will be suspended.

However, when you receive funds from a settlement or inheritance you can put those funds in a Special Needs Trust and they will not count against your government benefit eligibility for SSI & Medicaid.

What is a Special Needs Trust?

A Special Needs Trust allows persons with a disability that are unable to work to protect assets under 42 U.S.C. 1396. Special Needs Trusts are a safe harbor trust that are not accountable when determining an individual’s eligibility for SSI & Medicaid. The trust can hold funds in investment accounts, and may hold physical property like a car or a house. An Individual Special Needs Trust commonly has it’s own Tax ID. However Pooled Special Needs Trusts are linked and taxed to the Trust Beneficiaries Social Security Number. Pooled Trusts are taxed at lower rates generally than an Individual Special Needs Trust.

In order for a Special Needs Trust to be valid there must be a “Trustee” a person who is responsible for making distributions from the trust that will not compromise government benefit eligibility. The trustee must invest and manage assets, and the trust beneficiary cannot direct the investment choices.

The trustee controls how the property and assets in the trust are spent. The trustee is required to verify that all funds spent from the Special Needs Trust directly benefit the trust beneficiary.

A trustee can be a corporate trustee (bank), an individual (family member or professional fiduciary) or a non-profit association (Pooled Trust providers).

Fees for a Trustee can vary dramatically; on average, a corporate trustee charges at least $6,000 annually, Pooled Trust providers average 2 to 3% of assets under management, and Private Fiduciaries bill hourly and a percentage for assets under management. At CPT Institute, our Trustee Fees are a flat monthly fee from $50 to $100 per month.

Payments out of your trust

Trusts operate according to rules set by the Social Security Administration and the Department of Healthcare Services and vary significantly from state to state. Your trustee CANNOT make payments from the trust directly to the trust beneficiary, all distributions/withdrawals from the trust account must directly benefit the Trust Beneficiary.

Generally, your trustee should not pay for anything that could endanger the trust beneficiary. For example, the money cannot be used for something like skydiving. Your trustee cannot distribute the money in a way that, if not fiscally appropriate, all distributions must make fiduciary sense. Only in an emergency can your trustee make distributions that may compromise eligibility for government benefits.

Your trustee might use money in the trust to pay for things like:

  • Help from a caregiver
  • Getting your hair cut or nails done
  • Going to the movies
  • Buying clothes
  • Paying your phone bill or buying a TV
  • Insurance or medical needs
  • Pets and pet care expenses
  • Home renovations or furniture

Your trustee should have experience knowing what kinds of expenses are allowed and which ones are not. Always contact your Trustee if you have a question about something you would like the trust to pay for.

Different Types of Special Needs Trusts

The law establishes different types of Special Needs Trusts. Essentially, the differences in these trusts have to do with the source of the funds. If proceeds are from a settlement or are attributable to the trust beneficiary for tax purposes, you must place funds ins 1st Party Individual or Pooled Special Needs Trust.

If the trust proceeds are coming from anybody other than the trust beneficiary then a “third-party” 3rd Party Individual Special Needs Trust.

The government applies some different rules to the different types of trusts, but the trustee will take care of complying with the rules. They will need to keep very careful records, so they will probably ask you to provide receipts for everything. All these details are necessary to satisfy government requirements so you can maintain your eligibility for SSI and Medicaid.

How to Set Up a Special Needs Trust

If you have money from a settlement or inheritance and you don’t want it to be counted against you for benefits like SSI and Medicaid so you think you might want to set up a special needs trust, you should talk to an experienced attorney or a charity that focuses on Special Needs Trusts, like CPT. If you want your family to set up a trust for you, they should do the same. Talking to an experienced advisor can help you determine whether a special needs trust is right for your situation, and what type of trust to establish.

If you decide a trust is the best option and choose the type of trust, your trustee or advisor can find out whether a court needs to approve the trust, and they can give you advice about how to get approval.

If you set up a trust with the help of an organization like CPT Institute, you will work with a case manager who will explain all the documents and expectations. Then everyone signs the paperwork and starts the process of transferring funds into the trust. Once the funds are available to be distributed to you, they will let you know.

Ask Questions

Special Needs Trusts can be confusing. Most people only learn about these trusts and how they operate when they have one. So you will probably have many questions.

You have every right to understand your special needs trust, so do not be shy about asking questions. When you get answers, you can avoid making mistakes that could delay getting your funds from the trust. So questions are encouraged at CPT Institute!

Schedule a Consultation

Involving the client. Understand how the trust operates and create a plan of action to achieve it. Spanish Translator is available.


How You Can Spend a Special Needs Trust

So, how can you spend a special needs trust? Remember, a special needs trust helps to pay for expenses that your government assistance doesn’t automatically cover - that is, those expenses that will help improve an individual’s quality of life. The trust helps an individual pay for these expenses without losing their government assistance because trust disbursements are not considered unearned income.

However, there are limits on what your special needs trust can cover. Your special needs trust, as mentioned above, must be administered by your Trustee. In order for your trustee to grant your request for any funds, you must meet certain legal requirements - what CPT Institute calls the “3 Golden Gates.”

The Golden Gates: Special Needs Trust Guide

The 3 Golden Gates are your guide to disbursement requests from your special needs trust. You need to be able to pass through each one to ensure your government benefits are protected and your disbursement request is legal. Considering these gates will help to ensure you keep your government benefits while enjoying an improved quality of life.

Here are the 3 Golden Gates, your special needs trust guide. Simply ask yourself:

  1. Does my distribution request harm my physical or mental safety? It likely goes without saying that you cannot use your trust for activities which could compromise your physical or mental safety. For example, your trust funds will not cover a skydiving lesson or deep-sea cave exploration!
  2. Is my request in my long-term interest? The person who administers your trust has a fiduciary duty to you, which means they have to work in your best interest. If you want an expensive sports car that is going to drain your trust assets, for example, your trustee or administrator may require you to buy a more affordable car to preserve the funds.
  3. Will this expense jeopardize my eligibility for government benefits? The primary function of a trust is to allow you to spend money on general needs without losing your government benefits. What these general needs entail will depend upon your state and the specific regulations that govern your situation. Overall, the goal is to work toward your long-term interests so you can continue receiving government benefits while living the life you want to live.

If you keep those 3 Golden Gates in mind, you’ll make sure to future-proof your special needs trust and retain your all-important government benefits. This special needs trust guide is also helpful to have in case you don’t have immediate access to your trustee or organization. If you choose to work with CPT Institute, we can provide you with more information about this and determine if your disbursement request is proper.

Allowable Distributions

Allowable Expenses for a Special Needs Trust

Passing through the first two Golden Gates might sound simple, but how will you know if your expense will jeopardize your eligibility for government benefits? For this third gate, you need to consider whether your expense is allowable under the terms of your special needs trust. Your special needs trust covers two types of allowable expenses: general and supplemental medical costs.

Overall, general needs include expenses like:

  • Payments to caregivers
  • Attorney fees
  • Care manager, guardian, or personal aid services
  • Clothing and hygiene items
  • Motor vehicles, if applicable
  • Entertainment, possibly including legal gambling debt
  • Some recreational activities
  • Hair, nail, or personal care
  • Special needs sports
  • Special needs clubs or community involvement
  • Burial spaces (prepaid)
  • Insurance premiums
  • Electronics such as phones, television, Internet, satellite, and wi-fi

Even vacations might be covered under general needs, as well as visitation costs and fees. Likewise, some credit card debt may also fall under your special needs trust. Some other, lesser-known, needs might include guns - if the beneficiary passes the required background checks and does not have a condition that would preclude them from bearing arms - alcohol, pets and pet-related expenses, some plastic surgery, and renovations to a home.

Keep in mind that basic needs payments for things like food, rent, mortgage, or other shelter (i.e., rent, mortgage, electricity, gas and water, heating, etc.) expenses may result in a reduction of government benefits. This is because the SSI regulations consider these on a dollar-per-dollar income basis. Again, your trust covers expenses that your government benefits do not cover; trust disbursements are not intended to replace the benefits altogether.

The special needs trust also covers supplemental medical and medical-related needs, or those medical costs not covered already by government assistance. Depending on your plan, this could include:

  • Medications, prescription, or over-the-counter
  • Non-vital medical care, services, and procedures
  • Dietary supplements
  • Equipment such as wheelchairs, electric scooters, or other mobility equipment
  • Clothing
  • Nursing care or physical therapy
  • Medical implants
  • Artificial limbs
  • Special beds
  • Dental, vision, or auditory care
  • Cosmetic surgery
  • Home improvements that make living more accessible
  • Trial treatments
  • Alternative medical treatment, including medical marijuana (if legal in your state)

In summary, a special needs trust can be a versatile piece of financial security. If used properly, it can provide lasting benefit to the individual. CPT Institute can help you learn more about which type of disbursements are allowed and how you can spend your trust.

How Much a Special Needs Trust Costs

How much will your special needs trust cost? The average cost to set up a trust is about $3,000 dollars, but working with an organization or expert could actually decrease the amount you pay for the formation of your trust. It is important to note that prices can vary depending on the amount of funds placed into the trust, the needs of the beneficiary, the frequency of payments, and other factors.

At CPT Institute, for example, the pricing model looks like this:

  1. Set-up price to establish the trust. Unlike individual trusts, which can cost upward of $3,000, CPT Institute provides setup services for first-party and other trusts for around $2,000, with third-party trusts costing around $1,000 or less.
  2. Annual or monthly administration price. This is your recurring fee for the administration of your trust. CPT Institute does not charge you a percentage of trust corpus like many other trustees do, because the process can cause conflicts of interest. Instead, CPT Institute charges you based on an annual flat rate, around $600 a year, for lump sum cases. Alternatively, you might owe monthly payments ranging from $50 to $100 for structured cases. Court supervised cases only cost about $125 more, on average.
  3. Money management fee. This is a fee-based on a portion of Assets Under Management (AUM). It essentially pays for the bank to invest your funds and release checks. CPT Institute is proud to avoid proprietary investments as well as front load and trail fees.
  4. Other fees. CPT Institute offers tax preparation services for CA PSNT trust beneficiaries at a rate of $30. Mutual funds, money market funds, and exchange-traded funds (ETFs) also charge internal management fees, which are disclosed in the fund’s prospectus and deducted from the net asset value of the funds.

CPT Institute makes sure that your special needs trust set up includes follow-up, open communication, and flexible funding strategies. We also focus on eliminating conflicts of interest to ensure your trust administration is fair and transparent. If you choose to work with us, you’ll be able to customize your trust to fit your unique needs, and your trustee or administrator will work in your best interests to fulfill their fiduciary duty. Working with someone who knows the ins and outs of trust funds from CPT Institute can help you avoid costly mistakes down the road.

Contact CPT Institute for Your Special Needs Trust

If you’re looking for a 501(c)(3) charity to help you administer your trust, you can trust CPT Institute for your needs. We can set up a consultation with you to discover your options and offer you several flexible funding strategies to fit your exact needs. We also have years of experience in helping clients allocate their trust funds and can help you make a trust within a week from our initial consultation. It’s truly a win-win.

To get in touch and set up your first, fully confidential consultation, contact CPT Institute today. You can reach us at 877.695.6444. We look forward to speaking with you.