If you have a disabled child or dependent who receives government benefits, a regular inheritance could disqualify them from those programs. That's the problem special needs trusts solve.
These trusts let you provide financial support without jeopardizing SSI, Medicaid, or other means-tested benefits. The trust pays for things government programs don't cover: therapy, education, recreation, travel, quality of life improvements. But the trust has to be drafted correctly and administered properly, or you risk destroying the very benefits you're trying to protect.
At Kravets Law Group, our Wilmette, IL estate planning lawyer has been drafting special needs trusts for Illinois families since 2016. We understand the federal regulations governing these trusts and how to structure them to comply with both SSI and Medicaid rules.
Types of Special Needs Trusts
First-Party Special Needs Trusts
These are funded with the disabled person's own money. Personal injury settlements. Inheritances they've already received. Back pay from Social Security disability. Their own earnings if they can work.
First-party trusts are subject to strict requirements. The beneficiary must be under 65 when the trust is created. The trust must be established by a parent, grandparent, legal guardian, or court. It must contain a Medicaid payback provision, meaning when the beneficiary dies, Medicaid gets reimbursed for benefits paid during the beneficiary's lifetime before any remaining assets go to other heirs.
These requirements are non-negotiable. If the trust doesn't comply exactly, SSI and Medicaid will count the trust assets and the beneficiary loses benefits.
Third-Party Special Needs Trusts
These are funded with someone else's money, usually parents or grandparents. The disabled person never owns the assets, so different rules apply.
Third-party trusts don't require Medicaid payback provisions. When the beneficiary dies, remaining assets can pass to siblings or other family members. There's no age restriction on when they can be created. And they can be established by anyone, not just parents or guardians.
Most families prefer third-party trusts when possible. More flexibility. No payback requirement. Better for preserving wealth for other family members.
Pooled Trusts
Pooled trusts are managed by nonprofit organizations. Multiple beneficiaries' funds are pooled for investment purposes, but separate accounts are maintained for each beneficiary. These can be either first-party or third-party trusts.
Pooled trusts make sense when the amount of money involved is relatively small. The nonprofit handles all administration and trustee duties. Fees are typically reasonable. And there's no need to find an individual willing to serve as trustee.
The downside is less control. The nonprofit makes distribution decisions according to its policies. Some families prefer the flexibility of an individual trustee who knows the beneficiary personally.
What Can Special Needs Trusts Pay For?
The key rule: trust distributions can't provide food or shelter directly, or they'll reduce SSI benefits. Everything else is generally permitted.
Trusts commonly pay for medical and dental expenses not covered by Medicaid. Therapy, counseling, and rehabilitation services. Education and job training. Computers, phones, and electronics. Entertainment and recreation. Travel and vacations. Clothing beyond basic necessities. Furniture and appliances for the beneficiary's living space.
Some expenses require careful handling. If the trust pays rent directly to a landlord, that reduces SSI. But the trust can pay for modifications to make housing accessible, or furnishings for the residence, without affecting benefits.
Transportation is generally fine. The trust can buy a vehicle or pay for rideshare services. Companion care is usually acceptable if it's not simply custodial care that Medicaid should cover.
We help families understand what distributions are safe and what distributions create problems.
Selecting a Trustee
The trustee manages the trust and makes distribution decisions. This is a critical choice.
The trustee needs to understand benefit rules. They need to communicate with the beneficiary and understand their needs. They need to be financially responsible and organized. They need to be willing to serve for what could be decades.
Many parents name themselves as initial trustees, then name successor trustees to take over when they can't serve anymore. Siblings are common choices for successor trustees. Professional trustees or trust companies are another option, especially for large trusts or complicated family situations.
Whoever you choose, make sure they understand the responsibility. Trustee mistakes can cost the beneficiary their benefits.
Coordinating with Estate Plans
Special needs trusts need to coordinate with your overall estate plan. Your will or revocable trust should include provisions directing that any inheritance for your disabled child goes into their special needs trust, not to them directly.
You also need to inform other family members. If grandparents want to leave money to your disabled child, they need to leave it to the special needs trust, not to the child. Otherwise their well-intentioned gift causes harm.
Life insurance is another consideration. Many parents buy life insurance to fund the special needs trust at death. The trust is named as beneficiary. This ensures money is available to care for the child after parents are gone.
Trust Administration Requirements
Special needs trusts require careful administration. The trustee must keep detailed records of all income and distributions. They must file annual accountings with SSI and Medicaid if requested. They must ensure distributions don't jeopardize benefits.
Many trustees hire attorneys or professional advisors to help with administration. The cost is worth it given the consequences of mistakes.
The trust also needs to file its own tax return each year if it has income. Trust tax rules are complex, and special needs trusts don't get some of the favorable tax treatment other trusts receive.
Illinois Special Needs Trust Law
Illinois recognizes special needs trusts under the Illinois Trust Code. State law governs trust creation, trustee duties, and beneficiary rights. But federal law governs whether the trust protects government benefits.
That means we have to comply with both state trust law and federal benefit regulations. The trust document has to satisfy Illinois requirements for valid trusts while also meeting SSA and Medicaid rules for excluding trust assets from benefit calculations.
Illinois courts can modify special needs trusts under certain circumstances if all interested parties agree or if modification is necessary to preserve benefits. This provides some flexibility if circumstances change or if the original trust document has problems.
Common Special Needs Trust Questions
Can the beneficiary have any assets outside the trust?
Yes, but limited to $2,000 in countable assets. That typically means a small checking account for personal spending money. Anything beyond that needs to be in the trust.
What happens if the trust makes a mistake and benefits are lost?
The beneficiary loses benefits until the situation is corrected. Sometimes the trust can reimburse the government for benefits that shouldn't have been paid, and benefits can be reinstated. But this is complicated and stressful. Better to avoid mistakes in the first place.
Can the trust pay for housing?
Not directly without reducing benefits. The trust can pay for modifications, furnishings, and related expenses, but not rent or mortgage payments. Some families use complex arrangements where the trust owns the residence, but these require careful structuring.
How much does it cost to create a special needs trust?
We charge flat fees for special needs trust planning. The cost depends on whether it's first-party or third-party and how complicated the family situation is. Most families find the cost minimal compared to the benefits being protected.
Can we change the trust later?
Third-party trusts can usually be amended if you're still alive and the trust is revocable. First-party trusts are typically irrevocable and harder to change, though court modification is sometimes possible.
What if our child's disability improves?
If your child no longer needs government benefits, the trust can be modified or terminated. But most special needs trusts are designed for individuals with lifelong disabilities who will always need benefit support.
Working With Kravets Law Group
We've been helping Wilmette families protect disabled loved ones since 2016. We draft both first-party and third-party special needs trusts. We explain benefit rules clearly. We help you understand what the trust can and can't do.
When you work with us, we'll review your family situation and your loved one's needs. We'll determine which type of trust makes sense. We'll draft the trust document to comply with federal and state requirements. We'll coordinate the trust with your overall estate plan.
We also help families understand trustee responsibilities and can recommend professional trustees if needed. We're available to answer questions during trust administration to make sure distributions don't create problems.
We charge flat fees for special needs trust work, quoted upfront. We also offer free consultations to review your situation and explain your options.
If you have a disabled child or dependent, proper planning is essential. Call us today. These trusts are too important to get wrong, and the rules are too complex to handle without experienced legal guidance.
