An irrevocable special-needs trust is the best way to provide for a disabled or mentally retarded adult or child who needs to retain government benefits.
Such a trust can ensure that the beneficiary will have the things that enrich his or her life now and after you are gone and still qualify for essential government benefits such as Social Security and health care.
It's critical to word a special-needs trust correctly. The wording in many support trusts may jeopardize the beneficiary's access to government benefits.
The first step is to hire a lawyer who has experience creating special-needs trusts. Your trust documents must explicitly state that the trust and its funds are intended to supplement the benefits and services provided by the government. In some cases, the lawyer may recommend that you specifically exclude services such as room, board and life essentials.
Maintaining government benefits is not your only goal. You should also make sure the trustee can help the beneficiary meet his or her own goals and maintain family relationships. You can put almost anything in a special-needs trust: cash, mutual funds, life insurance and real estate.
Once you've created the trust, you must educate yourself on how to properly fund it. All too often, parents set up a special-needs trust but then neglect to modify their wills so that assets pass to the trust rather than to their child.
Those on Medicaid or who are receiving supplemental security income from Social Security can't own much or earn much. Someone who owns more than $2,000, say from gifts or an inheritance, will not qualify. There are also strict income limitations.
Also, bear in mind that not all assets pass by will. Make sure you name the trust as the beneficiary of life insurance proceeds that you want to benefit the disabled individual. If you have a retirement plan you want to leave to the trust, get expert advice to determine that your bequest will work as you intend.
If you're a grandparent with significant assets and a grandchild with special needs, consider setting up your own trust. That way you control who inherits any remaining assets after the grandchild dies.
Since the trustee has absolute power over the assets in the trust, pick someone you trust to have the beneficiary's best interests at heart. The trust can provide for transportation, training, entertainment, trips and vacations or a home-health aide.