Like many other states, Texas allows people to create special needs trusts that can provide financial help for people with disabilities. There are strict rules on how to set up a special needs trust and limitations on how the trust assets can be used. If these rules get violated, innocently or otherwise, a court could declare the trust invalid.
One of the harshest consequences of this result is that the beneficiary will likely be made ineligible for Medicaid and other essential government benefits. You will want to work with a Texas estate planning attorney who can set up the special needs trust and provide legal advice to help you in understanding Texas special needs trusts.
An Overview of Special Needs Trusts
There are many different types of living trusts. The purpose of a special needs trust is to enhance the quality of life for a disabled person without leaving them ineligible for public assistance. Medicaid and many other government benefits programs have limits on the amount of assets a person can own and still qualify for the programs.
Often, a well-intentioned parent or grandparent will leave an inheritance for a beloved relative who has a disability. If the asset goes directly to the individual with special needs, the gift will likely take the beneficiary’s total assets over the limit for government programs. For example, a $5000 one-time bequest to a disabled person will exceed their maximum allowed assets of $2000.
Fixing this problem is not as simple as spending down the $5000 to get under the $2000 limit. For some programs, once a person becomes a in eligible, it can take months or years to regain eligibility, and sometimes qualifying again is impossible. If this individual received $1500 a month in benefits like income, health insurance, housing allowances, and nutritional support, the loss of those benefits will be much greater over time than the $5000 inheritance.
If set up properly, this disqualification does not happen with a special needs trust because the assets are not given directly to the disabled individual. The trust owns the assets in the name of the trust. Because the person with special needs does not own the assets, they do not count against that person for purposes of eligibility for government assistance programs.
Pitfalls to Avoid with Special Needs Trusts
People setting up special needs trusts need to understand that any assets remaining at the time of the disabled beneficiary’s death will go to the government, not to other family members. The family should consider the assets of the special needs trust as gone from the family permanently.
When a person receives government benefits, it is at the cost of the taxpayers. All residual assets will go first to repay the government for those benefits. If any assets remain after reimbursing the government for a lifetime of care, then and only then can the remaining assets go to other beneficiaries.
The Importance of an Informed, Experienced Trustee
Also, the trustee of the special needs trust needs to know how the trust assets can be used. Using the trust assets for a prohibited purpose can disqualify the trust. The trustee can use assets on behalf of the beneficiary for things that can improve the quality of life, such as entertainment, education, and travel. The trustee is not allowed to give money directly to the beneficiary. The assets cannot be used to pay for housing and certain other necessities. This information barely scratches the surface of what you need to know if you want to set up a special needs trust to benefit a disabled loved one. You will want to talk with a Texas estate planning attorney for additional guidance. For legal help contact our office today, we offer a free consultation.