A special needs trust is a type of trust that preserves eligibility for government benefits while giving the beneficiary access to funds they can use for a wide range of expenses. One of the primary purposes many families initially consider in creating an estate plan is to provide for a child or another loved one with special needs. Most individuals living with a disability rely on needs-based government benefits, such as Supplemental Security Income benefits (SSI) and Medicaid benefits. However, both of these are needs-based programs. Therefore, families run into issues when planning for the future of their loved ones with special needs because if they leave them a significant inheritance, the recipient may lose benefit eligibility. A Florida special needs trust is often the solution.

Our Experience

At the Preddy Law Firm, P.A., our highly skilled team works closely with families to develop custom-tailored solutions to the unique issues they face. Attorney, Rose Marie Preddy has more than 25 years of hands-on experience drafting special needs trusts to ensure that those with special needs are provided for, without jeopardizing their eligibility for government benefits. Rose Marie Preddy, the founder of Preddy Law Firm, P.A., has dedicated her career to helping families plan for the inevitable, as well as the unexpected, since 1997. Attorney Preddy is a “Superb” rated attorney by AVVO and an “A-V Rated” attorney by Martindale-Hubbell—the highest classifications from these respected attorney-rating services. She has published numerous works throughout her career and is a frequent contributor to the Daily Record on various estate planning and special needs planning topics.

Types of Special Needs Trusts

The overarching goal of a Florida special needs trust is to allow individuals experiencing disability to live a more full life without risking the loss of important government benefits. There are several types of special needs trusts. Largely, the difference between these trusts is in where the trust assets come from.

Third-Party Special Needs Trusts

A third-party special needs trust is most often set up by family members who want to plan for the future of a loved one with special needs. Anyone other than the beneficiary can set up a third-party special needs trust. A third-party special needs trust can be funded through a last will and testament, or families can create a standalone special needs trust. If a special needs trust is funded through a will, the trust comes into existence only upon the death of the person creating the trust. However, many families want to immediately set up the trust, in which case a standalone special needs trust may be the better option. A standalone special needs trust allows multiple donors to add to the trust at any time. Standalone special needs trust does not need to be irrevocable to preserve benefit eligibility. However, if the beneficiary retains the right to revoke the trust, any funds in the trust will count toward needs-based benefit eligibility. Thus, most standalone special needs trusts are irrevocable trusts, or do not allow the beneficiary to revoke the trust.

First-Party Special Needs Trusts

A first-party special needs trust is funded by assets belonging to the beneficiary. These trusts are often created after someone with special needs receives an inheritance or some other large sum of money, perhaps through a court judgment. This type of trust is also useful for those who developed a disability later in life after accruing ample savings or purchasing a home. For these individuals who have significant assets, a first-party special needs trust allows them to qualify for government benefits without liquidating their assets. First-party special needs trusts are also commonly referred to as self-settled special needs trusts, Medicaid payback trusts, d4A, or d4C trusts.

The Key Differences Between First- and Third-Party Trusts

In terms of their formation, the difference between first-party special needs trusts and third-party special needs trusts is the source of funds used to create the trust. However, there is also a critical distinction between how these two trusts operate upon the death of the trust beneficiary. When the beneficiary of a first-party special needs trust passes away, the assets remaining in the trust will be used to reimburse the state for any Medicaid benefits provided to the beneficiary. However, when the beneficiary of a third-party special needs trust dies, the remaining trust assets do not need to reimburse the state. In this case, the trust’s creator retains control over what will happen with these assets once the trust beneficiary dies.

ABLE Accounts

While special needs trusts are a great way to provide for loved ones with disabilities, these trusts are managed by a trustee, giving beneficiaries little control over the assets. Many families want to provide their loved ones with additional independence. An ABLE account may be the solution. An ABLE account is a savings account for Florida residents who developed a qualifying disability before the age of 26. ABLE accounts allow individuals to maintain their own savings account. The funds in the account will not count toward needs-based government benefit eligibility, up to $100,000. Beneficiaries of a special needs trust can open their own ABLE account, providing them with additional financial freedom and independence.

Tax Implications of a Special Needs Trust

Income generated in a special needs trust is taxed. However, how the income is taxed depends on the type of trust.

Taxation of Third-Party Special Needs Trusts

According to the Internal Revenue Service, third-party special needs trusts are pass-through entities. Because of this, a trustee must file a tax return for the trust, reporting all trust income. Any distributions to the beneficiary are deductible, meaning the trust does not need to pay taxes on any income, provided it is distributed to the beneficiary. While the beneficiary must pay taxes on all distributions, this is generally at a lower tax rate. Thus, the goal is often to distribute as much trust income as possible to the beneficiary, reducing the overall tax burden.

Taxation of First-Party Special Needs Trusts

The Internal Revenue Service considers most first-party special needs trusts as grantor trusts. Thus, the beneficiary will report any trust income received throughout the year on their individual tax return.

Qualified Purchases with a Special Needs Trust

Beneficiaries of a special needs trust can use trust funds for a wide range of supplemental needs. The main limitation is that a beneficiary cannot use trust funds to pay for expenses that government benefits typically cover. Generally, this means that beneficiaries cannot use funds in a special needs trust to pay for food or shelter. However, a beneficiary can use funds in a special needs trust to pay for the following expenses:

• Medical expenses that were not covered by other sources
• Therapy or rehabilitation costs
• Education
• Job training
• Travel, including the cost of bringing along a companion
• Computers
• Insurance expenses
• Equipment, including wheelchairs or other assistive devices
• Recreation and entertainment
• Vehicles
• Public transportation

The trustee is responsible for all distributions. If a trustee approves a distribution for a non-qualified expense, the amount of the distribution will count as an “asset” for the purposes of government eligibility. While it is generally advisable not to make unqualified distributions, doing so may be in the beneficiary’s best interest in certain, limited situations.

Why Hire a Lawyer?

Special needs trusts are complex, both in terms of creating the trust document, as well as when it comes to making qualified distributions. To correctly set up a special needs trust, individuals must understand the relevant state and federal laws, or they run the risk of the trust not accomplishing its intended goals. Issues can arise when selecting the proper type of trust, transferring assets into the trust, and administering the trust. While there is no requirement that trust creators work with a lawyer, hiring a Florida special needs trust lawyer can make the process much easier, providing invaluable peace of mind to creators, trustees, and beneficiaries.

Will Contests, Trust Disputes, and Guardianship Litigation

In certain situations, the assistance of a lawyer is particularly important. This is especially the case when the will creating the special needs trust is contested. If another person contests the will’s validity, this can delay—or even prevent—the formation of the trust. In other cases, the trustee of a special needs trust fails to live up to their legal obligations, giving rise to a potential misappropriation claim. When these complex situations arise, the possibility of litigation significantly increases. A lawyer can help clients navigate this landscape in hopes of resolving the dispute efficiently without risking unnecessary delay or the depletion of trust assets.

Contact a Florida Special Needs Trust Attorney for Assistance

If you have a loved one with special needs and want to learn about how you can provide for them without jeopardizing their eligibility for SSI and Medicaid benefits, reach out to the Preddy Law Firm, P.A. Our Florida special needs trust attorney will help you understand each of your options and work with you to set up a special needs trust that meets your family’s specific needs. The firm owner and lawyer, Rose Marie Preddy has more than 25 years of experience helping families develop custom estate plans. We can effectively advise you on the best way to set up the trust to maximize tax savings, preserve benefit eligibility, and enhance your loved one’s life. To learn more, call 904-665-0005. Or you can complete our online form, and we will contact you.