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Important tips for special-needs trusts: Spending the money

On Behalf of | Jul 20, 2023 | Estate Planning, Special Needs Trusts |

Setting up a special needs trust for your adult child in your estate plan is an act of love. You want your assets to be used to enhance their life, without negatively affecting their entitlement to needs-based benefits like Medicaid or Supplemental Security Income (SSI).

In order to make the trust effective and avoid problems, it helps to understand how the money in a special needs trust can actually be spent. Here are some ground rules that you, the trustee and your child (if possible) need to understand:

1. The money has to be used solely for the beneficiary

The trustee is not free to divert the money to any other cause. For example, a trustee cannot use the money to help one of your other children, no matter what the circumstances. 

2. The money cannot be used for regular living expenses

SSI and other needs-based programs, including housing allotments, are designed to cover the beneficiary’s regular living expenses. If the money in the trust is used for their rent or utilities, that can cause their benefits to be decreased. 

This means that the funds from the trust have to be used strictly for supplemental needs or comfort items. For example, you can spend the money on things like:

  • A home health aide or companion care
  • Special classes or educational camps
  • Electronics, including a television or computer
  • Hobby items, including supplies 
  • Transportation costs, including Uber rides or a bus pass
  • Vacations, retreats and respite care

3. The money cannot be given to the beneficiary directly.

The trustee cannot give the beneficiary cash to spend on any of the above items because that would likely be counted as income that would offset their other benefits.

To circumvent this issue, the trustee needs to pay for items directly. For example, instead of giving the beneficiary $800 for a laptop, the trustee would need to arrange to pay the store where the laptop was obtained, instead.

Planning ahead for your loved one’s needs is important to you, so make sure that you have the appropriate legal guidance you need.