What Is a Special Needs Trust

Overview

Special needs trusts are essential tools for individuals receiving government benefits who come into an inheritance, settlement, or other financial windfall. In this episode, attorney Michael Rutkowski of the Rutkowski Law Firm explains how these trusts work, who needs them, and how they help protect eligibility for critical benefits like Medicaid and SSI. He also discusses the key differences between first-party and third-party special needs trusts and outlines how to set them up correctly to ensure compliance with state and federal laws.

Key Takeaways:

• Special needs trusts help individuals on government benefits (like Medicaid or SSI) retain those benefits after receiving a financial windfall.
  
• A lump-sum settlement or inheritance can disqualify someone from benefits unless it’s placed in a properly structured trust.
  
• There are two main types:
  • First-party special needs trust: Funded with the beneficiary’s own money (e.g., lawsuit settlements).
  • Third-party special needs trust: Funded with money from someone else (e.g., a parent or grandparent).
     
• First-party trusts require the state to be reimbursed for benefits upon the beneficiary’s death, while third-party trusts are more flexible in both use and remainder beneficiaries.
  
• Both trust types must be irrevocable and have a third-party trustee (not the beneficiary themselves).
  
• These trusts can be used for most expenses except food and shelter — items like travel, gas, and phone bills are usually eligible.
  
• If you're already on benefits and are about to receive money, consult an estate planning attorney to protect your benefits.

Full Transcript

Hello and welcome back as we continue to discuss estate planning and how you can do it yourself or get support from an attorney near you.

Today with me, I have Michael Rikowski. We're going to continue our conversation from the last video, irrevocable trusts. We talked about how there are over 60 possibilities of all the different trusts you could need based on your specific needs.

Speaking of needs, there's also a trust dedicated to special needs. And that's what we're going to talk about today.

Michael, welcome back.

Yeah, thanks for having me. Yeah, let's keep talking about it. Irrevocable, irrevocable — we'll get it right.
I don't know which one is right, but we all know what we're talking about.
We do.
We do. I will get it right the minute we are done recording all of these videos. That's what's going to happen.

It's going to be great. Well, let's talk about special needs trust in particular. So what is a special needs trust and who might need this and why?

So this is a layer or another type of irrevocable trust.
High-level problem we're trying to solve here is that we're working with an individual or family where someone is receiving some type of government benefits.

So whether that's an individual that's on SSI, Social Security Income, Social Security Disability, Medicaid health insurance, Medicaid long-term care — there's lots of different government benefits.
But the main thing that we're trying to do is keep someone from getting cut off from those benefits.

So let me give you an example.
We work with a lot of attorneys all over the state of Michigan and elsewhere where maybe they're a personal injury attorney, a disability attorney where their client was hurt on the job and is receiving workers' compensation disability benefits.

Well, if they receive a lump sum settlement from the employer because of their injury, that is going to be considered income and will kick them off their benefits.
So maybe they're receiving a monthly benefit worth $1,500, $2,500 — these are significant benefits someone might be receiving.

But if they receive that $50,000, $100,000 as a lawsuit settlement, that is going to disqualify them from their benefits.

What can we do to help?
And there are these things called special needs trusts, also referred to as supplemental needs trusts, where essentially that money can be held in a trust for the person's benefit to kind of play simultaneously with the government benefits.

Government benefits cover these things over here. The supplemental needs trust can cover the difference of these things over here. And that way, it doesn't kick you off your benefit.

So you can essentially double dip.
You can continue to receive your government benefits, but also take full advantage of the inheritance you might have received, the lawsuit settlement you might have received.

Let's just sit for a second on what it means to have benefits from the government in terms of special needs. What is that? Can you be more specific in regards to — is that injury? Is that disability?

All of the above.
There's a lot of different government benefits an individual can qualify for.
And it's a wide array of reasons why you might qualify.

There's Medicaid health insurance — that's a means-based test, which means you're going to be looking at assets and income to see if someone qualifies.
Any age individual can receive this.

So this is in lieu of some other type of health insurance like Blue Cross Blue Shield, where you might be paying for that out of pocket.
This is a government assistance benefit.

You're receiving that — food assistance, food stamps, those kinds of things — those are government benefits.
There's lots that you could be entitled to: Social Security Income or Disability.

And so the main goal of what we're going to try to help with as estate planners is using that supplemental needs or special needs trust in order to keep someone on their benefits.

In order to qualify for it, you have to already be on benefits from the government, from a special needs perspective.
And then let's say you have a large sum income coming your way, whether that's an inheritance or a gift, or if you're settling from a personal injury and getting paid for that.

So let's assume that somebody says, "Yes, I need this. Yes, I qualify. That sounds like me."
How do they get started with setting up this trust so that that can go somewhere?

Great question.
That is typically the case where it kind of falls in our lap — there's an individual who's already receiving benefits, where they have some money coming their way.

And there's lots of reasons why — maybe it's a mom or dad has passed away, and there's a little inheritance coming their way.
And it doesn't have to be much — it could be $10,000 coming from a parent, and that's going to kick them off.

And I've talked to so many families, and just the process of going off and coming back on is such a headache.
That it's just great to figure out a way to streamline it and keep them on those benefits.

When doing these types of trusts, there's first-party special needs trusts and third-party special needs trusts.
Those are just fancy ways to say whose money is it that we're receiving.

Is it our own money that we're entitled to — like a lawsuit where it's ours because we were the one that was injured?
That's a first-party.

Or a third-party special needs trust — maybe it's coming from a parent, maybe we're setting this up for parents who have a disabled child.
Maybe we're setting this up in advance so that if something happens to mom or dad, this can go in there.

Everything's already set up. They receive their government benefits because they can't be gainfully employed.
And that's your third-party. Someone else's money is third-party.
Your own money is first-party.

The rules are a little bit different. They're a little bit more strict when it's your own money versus someone else's money.
So in the state of Michigan, we call them D4A trusts — it's just the statute that governs this.

What's really important about protecting assets of your own to stay on government benefits is a couple of things:

• One, it has to be irrevocable.
• Both these trusts have to be irrevocable.
• Also, both trusts need third-party trustees, meaning anyone else in the world can be the trustee of the trust, but not the beneficiary.

So if it's my special needs trust, you could be my trustee — anyone else in the world could be my trustee — but I can't be my trustee.
You have to be able to work with someone else to get access to that money.

Then the final big difference between first-party and third-party is just restrictions on what it can be used for and who needs to be the beneficiary of the trust.

So for a first-party D4A trust, the state has to be the primary beneficiary.
So if it's my trust, I have to make the state the primary beneficiary, and then I can have a backup after the state gets reimbursed for what they paid for me.

Let’s say over my lifetime, they spent $100,000 on my medical insurance — they get reimbursed that $100,000 first, and then everything else that's left, I can direct to go to wherever I want — my kids, whoever that might be.

Third-party special needs trust — if it's coming as an inheritance from grandma, grandpa, mom, or dad — it can be more flexible.
You can use it for more things. There's more discretion in it.
And the beneficiary can be different as well.

So it sounds like ideally it would be great if it was third-party.
It sounds like it's a little trickier and a little bit more guarded if it's first-party, which makes sense.

It does make people a little bit more nervous that the state has to be the primary beneficiary.
And of course, I guess there's the risk that if you passed away close in time to creating this trust — yeah, they'd get paid.

But at the end of the day, a lot of times, let’s just say the settlement’s $100,000 and the person’s 50 years old or less — we’re going to easily teach them how to spend that $100,000 over their lifetime.

So there’s really not going to—we’re going to go through those funds prior to that.
You can use it for things like vacations and stuff.

You need new tires on the car.
There's a laundry list — maybe that's a whole other episode — of what it can be used for.

But essentially it can be used for pretty much anything except food and shelter.
The purpose of a government benefit of a first-party is to cover food and shelter.

Everything else — your cell phone, travel, gas — can all be used out of the trust.

That sounds like a great next episode.
So if you'd like to hang on and learn more about how you could access the money from your trust and how to use it — whether it's special needs or otherwise — stay tuned.

Michael, in terms of special needs trust specifically, is there any other pitfalls or recommendations you want to make as we close out here?
No, I don't think so. I mean, really, it just starts with — are you on government benefits?

If the answer to that is yes, and it's important for you to stay on those benefits, and any money’s coming your way — it's really important to get in place one of these trusts.

So once you set it up, if this isn't going the way you wanted it to — you can dissolve things and get it back the other way.
Beauty of a trust.
Beauty of a trust.

Wonderful.
Well, if you qualify for this and you would like some help, please contact the Rutkowski Law Firm.
The phone number is below.

We’d be happy to set up a free consultation call to see how we might be able to support you in setting up a special needs trust.

If you want to learn more about trusts and how you might be able to access them and what you could use them for, please continue to watch and we’ll see you next time.