February 25, 2024 4:05 PM
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Disadvantages of a Special Needs Trust

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What are the disadvantages of a special needs trust

Special needs trusts are a tool used to help individuals maintain government benefits such as Supplemental Security Income (SSI) and Medicaid. However, they also can have a number of disadvantages.

Often, families set up this type of trust to make sure their loved ones are taken care of when they can no longer do so themselves. It can be a useful tool, but it is important to consider the disadvantages before deciding to use one.

1. High Annual Fees

Special needs trusts can be expensive, with fees ranging from 1-3% of the assets. This can be a significant expense for families, especially those with limited resources.

Many special needs trusts are set up by nonprofit organizations, which can minimize these costs. However, not all nonprofits are created equal.

Another disadvantage of a special needs trust is that it may be difficult for the beneficiary to manage the funds. This means that the trustee may need to monitor the beneficiary’s spending habits.

Trustees must also avoid distributions that will cause the beneficiary to lose their government benefits. This is because these programs are meant to be “means tested,” and have very strict asset limits.

2. Limited Independence

The limited independence associated with a special needs trust can be frustrating for the beneficiary. They do not have control over the funds, and the trustee has full discretion as to how they can be spent.

In contrast, ABLE accounts provide additional independence for beneficiaries of a special needs trust by giving them the freedom to own assets without counting them against government benefit eligibility.

Whether you decide to set up an ABLE account or a special needs trust, it is best to consult with an attorney who specializes in this area. They will help ensure the documents are drafted properly and reflect your desires. They also will be able to answer any questions you have about the process. Ultimately, they will be there to assist you in making the right decisions for your family.

3. Ineligibility for SSI or Medicaid

If your disabled loved one relies on SSI or Medicaid, you may be able to protect their eligibility for both government benefits by leaving them money in a special needs trust. However, this can come with a few disadvantages.

Firstly, some states have chosen to use income and resource limits that are stricter than those used by SSI. This can mean that a disabled individual who has accumulated a lot of wealth could be ineligible for SSI or Medicaid.

Fortunately, federal law allows individuals under 65 to place assets in a special needs trust to maintain eligibility for Medicaid without having them counted as resources or income for SSI. This can be especially useful if your loved one receives an inheritance or personal injury settlement that you do not want to disqualify them from receiving SSI or Medicaid benefits.

4. Limited Tax Benefits

A special needs trust is an estate planning tool that can be beneficial for people with disabilities. It can help preserve federal and state benefits such as SSI (Supplemental Security Income) and Medicaid while also providing money to fund travel, entertainment, education and other important expenses.

Often, the funds for a special needs trust are funded through an inheritance, litigation settlement, life insurance or other major gift. The trust will not count toward the assets of the beneficiary when determining their eligibility for government benefits like SSI or Medicaid, making it a good estate planning tool.

The key is to select a trustee who can manage the trust and oversee distributions. Having the right person in charge can ensure that all disbursements are made in the best interests of your child.

5. Uncertainty

Uncertainty is a condition in which something is not precisely known or fully understood. It can happen in any situation where a decision must be made, such as predictions of future events or physical measurements.

It can also occur when someone is making an opinion based on incomplete or inaccurate information. It is a condition that can be detrimental to the well-being of a person with special needs.

One way to avoid this is to set up a pooled trust. These are trusts run by nonprofit organizations that pool the funds of many people with special needs and then invest them for the benefit of each beneficiary.

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