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| Milestone Consulting, LLC

Thousands of children with disabilities rely on government programs like Supplemental Security Income (SSI) and Medicaid every day. For many families, these benefit programs are absolutely essential, helping them meet their child’s basic needs. But public programs like SSI and Medicaid are means-tested, only available to people who have little income and few assets. When a child comes into an inheritance, or secures a personal injury settlement, their eligibility for benefits can be threatened.

This presents a unique challenge, both for parents and children with special needs. The solution often comes in the form of a trust, a legal financial arrangement that allows a designated party to hold assets on behalf of a chosen beneficiary. In fact, there are specific trusts, known as special needs trusts, intended to negotiate this thorny financial terrain.

Special Needs Trusts: An Overview

In general, special needs trusts allow children with disabilities to benefit from the use of a settlement or inheritance, without losing means-tested government benefits. Rather than opening a bank account in your child’s name and simply depositing the settlement money, the newly-received assets can be gifted to the special needs trust.

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Normally, people who set up a trust will designate a trustee, someone who agrees to hold the assets and utilize the funds according to a plan established by the fund’s donor. “First-party” special needs trusts work similarly. These trusts are funded using assets that belong to the person with special needs, like an inheritance or settlement, and administered by an appointed trustee.

While funds from the trust can’t be given directly to the beneficiary, since that would threaten their eligibility for government programs, the assets can be used to make certain eligible purchases that benefit the beneficiary. A first-party trust, however, can’t be established by the person who will become its beneficiary. Instead, they have to be set up by a parent, grandparent or court.

Pooled Special Needs Trusts

Setting up a first-party special needs trust is a great choice for many children, but there is another option. Pooled special needs trusts offer many of the benefits presented by other trusts, but with some notable differences.

How Pooled Trusts Work

Pooled trusts are set up and operated by non-profit organizations, which pool together the resources of multiple families for investment purposes.

Instead of choosing your own trustee, the non-profit will select a trustee to administer the funds in your child’s individual account. This is an important point, one explicitly established in the Omnibus Budget Reconciliation Act of 1993, the federal law authorizing both first-party and pooled special needs trusts. Pooled trusts must maintain individual accounts for each beneficiary, although they can pool the resources together for investment and management.

There is, of course, a catch, but it’s one shared both by first-party and pooled special needs trusts. When an account’s beneficiary dies, the remaining assets held in trust may need to be used to reimburse the government for the medical services provided during the beneficiary’s life. State laws vary on this point, though. Some allow the trust itself to retain the assets, using them to benefit other beneficiaries with disabilities. In other states, a combination of Medicaid pay-back and nonprofit retention is required.

Benefits Of A Pooled Special Needs Trust

Pooling resources can have major benefits. With more funds at their disposal, pooled trusts are often able to provide extra management services, accept smaller trusts and select from a wider array of investment options than first-party trusts. Moreover, establishing an account with a pooled trust is often less expensive than setting up a first-party trust, although this isn’t always the case.

Another interesting distinction is that individual accounts can be established by the person with a disability, along with parents, grandparents, guardians or the court. First-party special needs trusts, on the other hand, can’t be set up by the person who will ultimately benefit from use of the trust’s assets. As an added benefit, Congress has not prohibited pooled special needs trusts from accepting third-party donations, like additional funds gifted by a parent or grandparent. While some pooled special needs trust prohibit third-party donations themselves, the possibility is not precluded as a general rule. Unlike pooled special needs trusts, most first-party trusts can only be funded using assets that originally belonged to the trust’s beneficiary.

Since you’re choosing an organization, and not an individual trustee, to handle the trust, a pooled trust often offers greater stability in trust administration. Administering a trust is a big responsibility, after all, one that many people, no matter how well-intentioned, just aren’t suitable for. Turning to a professional trustee, someone who works for a bank or trust company, is one solution, but professionals rarely agree to accept trusts of lower values. Their costs can be prohibitively high, too. For smaller settlements or inheritances, pooled special needs trusts present a healthy middle-ground. Gain the experience and knowledge of a professional, without paying inordinate sums to establish the trust in the first place.

Limitations Of A Pooled Trust

Working with a reputable non-profit is key. Every pooled trust, of course, is different. Each will have a different fee structure and different methodologies for asset management. Some only distribute assets on a schedule, which can be bad for beneficiaries who require more frequent distributions. It’s very important to compare your options carefully before signing on. Every pooled trust, however, will be inflexible, at least compared to a first-party trust. The trust’s investment choices can’t be tailored individually.

Despite these limitations, a pooled special needs trust is likely the best option for many children with disabilities. But selecting the appropriate trust, and ensuring that a child’s benefits are not cut off, can be difficult. This is especially true for families who are expecting a settlement from a personal injury lawsuit, when careful planning can ensure long-term support – and mismanagement can mean losing the assets entirely. Many families benefit from the guidance and experience of a settlement planner, someone committed to their child’s best interests. To learn more about how an experienced settlement planner can help protect your child’s future, click here.


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