Special Needs Trust Spending Rules

When caring for loved ones with disabilities, ensuring their financial security while preserving their access to essential government benefits presents a unique challenge. Special needs trusts offer a thoughtful solution for parents of children with disabilities, adult children supporting aging parents with special needs, and individuals planning for their own future care requirements. These specialized legal arrangements help protect vulnerable beneficiaries while providing resources that enhance their quality of life beyond what government programs typically cover.

Special needs trusts (SNTs) provide financial support for individuals with disabilities without affecting their eligibility for government benefits. Understanding spending rules is essential to avoid misusing funds and ensure continued compliance with Medicaid and Supplemental Security Income (SSI). Special needs trust fund rules are designed to protect both the assets in the trust and the beneficiary's eligibility for crucial government assistance programs.

To help you understand this complex issue, we'll cover what an SNT can and cannot pay for, how funds should be managed, and key considerations for trustees. We've reached out to Ashley Higginbotham, LegalShield provider lawyer and Supervising Attorney at Deming Parker, LLC, to give us her insight on SNT spending rules. Enjoy learning from Higginbotham as we dive into this topic below.

What can a special needs trust pay for?

Special needs trusts cover expenses that enhance the beneficiary's quality of life without replacing government benefits. Proper spending ensures that the trust funds supplement but do not interfere with SSI or Medicaid eligibility.

According to Higginbotham, "This is going to depend on the language of the trust, but generally the trust grants broad powers to the trustee to use the funds in any way that it would benefit the special needs beneficiary. The funds could be used for food, rent, a car, electronics, medical care, therapy or training courses, clothes or personal items, and even entertainment."

Approved expenses

When asking, "What can a supplemental needs trust be used for?" you want to know specifics. Bear in mind that expenses vary in whether they will be approved or not, so it’s best for you to speak with a lawyer. These are some of the commonly approved expenses:

• Medical and dental care not covered by Medicaid
• Educational programs, tutoring, and specialized training
• Transportation costs, including vehicle modifications
• Assistive technology, home modifications, and accessibility improvements
• Personal care attendants and caregiving services
• Recreation and entertainment activities
• Vacations and travel expenses
• Electronic equipment like computers, tablets, and phones
• Professional services such as financial management or legal counsel

What can a third-party special needs trust pay for? Generally, these trusts can pay for the same expenses as other SNTs but without the Medicaid payback requirements that first-party trusts have. This gives the trustee more flexibility in how funds are used for the beneficiary's benefit.

Non-covered expenses

Understanding what a special needs trust cannot pay for is equally important for proper trust administration:

• Direct cash payments to the beneficiary
• Food and shelter costs if the trust is not structured properly (may cause reduction in SSI benefits)
• Expenses already covered by government programs (e.g., Medicaid-covered medical costs)
• Gifts for others or charitable donations
• Illegal activities or purchases

Managing special needs trust disbursements

Proper trust management ensures compliance with legal and tax regulations. Trustees must understand spending rules and reporting obligations to maintain the beneficiary's eligibility for government benefits. Special needs trust fund rules require careful documentation and appropriate distribution of assets.

"There are legal and tax regulations when handling and managing trusts and it can be a big task for anyone who has been given the role of managing a trust for a loved one," explains Higginbotham. "It's important for trustees to understand and fully grasp the spending rules and obligations so they know how to maximize the benefits and so they can comply. This is where asking a lawyer to help you understand is needed. We want people to understand the law so they can take full advantage and not have to worry they're doing something wrong. It's a big job to be in a trustee's position and they don't have to navigate it alone."

Trustee responsibilities

Higginbotham explains, "The trustee must comply with the language set forth in the trust and must act in the best interest of the beneficiary. Specifically, when making distributions under the trust, the trustee should not give the funds directly to the beneficiary but pay directly the vendor, the landlord, the medical provider, school, etc."

Trustees have quite a few duties to carry out as they manage SNT funds. These involve keeping detailed records of all disbursements, as well as ensuring that the funds are used for the beneficiary's best interest. Trustees must be careful to avoid transactions that could reduce SSI or Medicaid benefits. The trustee needs a thorough understanding of the impact that different types of distributions could have on the trust and the beneficiary.

Oversight and compliance

When asked about oversight requirements, Higginbotham notes, "This is state-specific, so you need to check with an attorney in the state where the trust was created."

"It is always best to consult with a lawyer who is licensed in your state as they will know your state's laws and regulations best," notes Higginbotham. "A lawyer who has a background in family law or estate planning law will be best able to help answer your questions."

While particular oversight rules vary by state, some general compliance considerations include:

• Annual reporting requirements for some trusts
• Regular accounting to beneficiaries and other interested parties
• Tax filings and documentation
• Periodic review of the trust's terms and conditions
• Consulting financial or legal professionals for proper fund management

How to spend money from a special needs trust?

Spending money from a special needs trust must be done carefully and strategically. The trustee must follow a specific process to ensure distributions support the beneficiary while maintaining benefit eligibility.

First, the trustee should always verify that the expense is allowed under both the trust document and benefit program rules. Second, payments should typically be made directly to service providers rather than to the beneficiary. Finally, all expenses must be thoroughly documented with receipts and records of how the purchase benefits the individual with special needs.

As Higginbotham advises, "When making distributions, always consider how the expense improves the beneficiary's quality of life while following the specific language in the trust document. Consistent record-keeping is essential for demonstrating proper use of trust funds."

Housing and living expenses

Many people wonder: Can a special needs trust pay for housing? And can a special needs trust pay rent?

The answer is yes, but with important considerations:

• Payments for shelter expenses may reduce SSI benefits.
• Direct rent payments to landlords are preferable over giving money to the beneficiary.
• For owned homes, can a special needs trust pay for home repairs? Yes, typically these are allowed expenses.

Housing costs represent one of the most common yet complex areas of special needs trust spending. While these expenses can be covered, they must be handled strategically to minimize impact on benefits. In some cases, in-kind support and maintenance rules may reduce SSI benefits when the trust pays for certain housing costs, so it's important to work with an experienced attorney to structure these payments appropriately.

Common questions about special needs trusts

Many people have concerns about limits, withdrawals, and potential downsides of SNTs. Higginbotham has answered some of the most common concerns that you may have about an SNT.

How much money can be put into a special needs trust?

Higginbotham explains, "This depends on the type of SNT and the state where the trust was created. For most states, there is a maximum amount per year that can be placed in a first-party SNT. For third-party SNTs, there is usually no cap on the amount that can be placed into the trust."

Additional considerations include:

• No universal legal limit, but large contributions may require additional legal structuring.
• Third-party trusts vs. first-party trusts have different funding rules.
• Estate planning strategies may affect optimal funding amounts.

Can you withdraw money from a special needs trust?

"This will depend on the language of the trust but for most states and most SNTs, there is no limit on the amount that can be withdrawn from the trust—so long as it is used for the beneficiary's best interest and is not given directly to the beneficiary," states Higginbotham.

The trustee must make sure to follow important withdrawal guidelines. These include the fact that the trustee controls disbursements, meaning that beneficiaries cannot withdraw funds directly. Withdrawals must comply with legal guidelines to protect benefit eligibility. And as with any complex legal process, it's important that everyone keeps proper documentation of all withdrawals.

What are the downsides of a special needs trust?

When asked about potential drawbacks, Higginbotham offers an optimistic perspective: "I don't see any downside. An SNT allows the beneficiary to benefit from the use of the funds in the SNT while still qualifying for government assistance and benefits like Medicaid and SSI."

However, an SNT could come with some of these potential challenges:

• SNTs can be complex to set up and manage.
• Restrictions on direct cash payments to the beneficiary.
• Some states impose additional requirements or limitations.
• Professional administration may increase costs.

Ensuring compliance and maximizing benefits

Special needs trust spending rules are designed to protect the beneficiary's eligibility for government benefits while improving their quality of life. Trustees must carefully manage disbursements to ensure compliance and avoid penalties.

Consulting with legal or financial professionals can help trustees navigate complex rules and ensure the best outcomes for the beneficiary. That's where LegalShield comes in!

How LegalShield can help

Managing a special needs trust requires careful attention to legal details and compliance with both state and federal regulations. LegalShield provides affordable legal access to a provider law firm in your state to help navigate these complex matters.

Higginbotham explains how legal professionals can assist: "The attorney can help guide the trustee in how to properly make the payments, to ensure the payments are in line with the language of the trust and ensure that the funds are used for the best interest of the beneficiary."

LegalShield provider law firms offer valuable services for special needs trust administration:

• Document review of trust documents and spending plans
• Scheduled consultations with experienced attorneys
• Legal advice to address ongoing concerns
• Guidance on compliance with state-specific regulations

With a LegalShield Membership, you gain access to qualified attorneys who can help ensure your special needs trust operates within legal guidelines while maximizing benefits for your loved one. LegalShield provider law firms have experience in estate planning, including special needs trusts, and can provide the legal support needed to navigate these complex rules.

For more information on how LegalShield can assist with estate planning and special needs trusts, visit LegalShield's Estate Planning page.

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Written by Elyse Dillard, Content Specialist at LegalShield. Elyse creates educational resources about legal and identity theft protection services. She works to make complex legal concepts more accessible to readers and has contributed to numerous articles on the LegalShield blog.

Deming Parker, LLC, is a LegalShield provider law firm with offices in Atlanta and Savannah, Georgia. Staffed by over 50 attorneys, they provide legal services across multiple practice areas including, but not limited to, corporate law, family law, criminal defense, estate planning and probate, personal injury, workers' compensation, bankruptcy, business transactions, incorporations, and collections.

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