Building Your Assets and Wealth

Trust Funds

A trust is a legal arrangement in which a person or organization manages assets for someone else. The trust's assets can then be used to make payments for that person's expenses. The person whose expenses are paid for by a trust is called the “beneficiary” and the person or organization who is managing the assets is the “trustee.” Many kinds of assets can be put into a trust, such as cash, stocks, bonds, and real estate.

Some kinds of trusts, called Special Needs Trusts, can be set up to hold assets for a person with a disability. The assets in a Special Needs Trust do not affect the person's eligibility for programs like Supplemental Security Income (SSI), Medicaid, and, in many cases, Section 8. That means that if you are the beneficiary of a Special Needs Trust, your trust can have more assets in it than the resource limits for benefits programs usually allow. This can let you be more secure financially without losing your benefits. For more details, see Social Security's information about Special Needs Trusts and SSI eligibility.

The trust must be set up correctly. If your Special Needs Trust is not set up correctly, the assets in your trust might be counted toward public benefits resource limits and you could lose your public benefits. And after you die, the type of Special Needs Trust that was set up determines whether or not the assets in the trust have to be used to repay the government for any Medicaid expenses or can be left to other family members.

Special Needs Trust Rules

While public benefits, such as SSI, Medicaid, and HUD housing benefits, offer a basic level of support, a Special Needs Trust can be used to pay for other things. For example, money from the trust could be used to pay for your recreation expenses, telephone bill, education, and vacations. In some cases, using money from a Special Needs Trust to pay for food or housing expenses might affect your benefits. Some Special Needs Trusts say specifically that the money cannot be used to pay for these types of expenses. Others warn the trustee that doing so can cause the beneficiary's benefits to go down, but say that the trustee should make the best choice for the beneficiary based on all the factors.

Additionally, the funds in some types of Special Needs Trusts can be used to benefit only you; no one else can benefit from the trust unless it is what is called a Third Party Trust. And while the trust is set up to help you, payments should not be made directly to you. Payments made directly to you count as income and may affect your benefits.

Only the trustee can handle the money from the trust. When you need to pay a provider for something, the trustee will pay the money from the trust directly to the provider. In some cases, the trustee may put money into an ABLE account to give you direct access to cash and increase your sense of independence, but the trustee must make sure that the total amount put into the ABLE account does not go over the annual contribution limit.

In Illinois, there are three types of Special Needs Trusts:

Each type of trust has its advantages and disadvantages, and the right type for you depends on your specific circumstances. These types of trusts are explained below.

Get advice before setting up a trust

Trusts are complicated in general, and Special Needs Trusts are even more complex than other types of trusts. Contact an attorney who specializes in them so that you can get advice about which type of trust is right for you and how to set it up. If you don't do things right, you could have serious problems.

Find an attorney through the Special Needs Alliance or the Illinois State Bar Association.

Self-Settled Trusts

Self-Settled Trusts are used if you have accumulated assets, inherited assets, or gotten assets from a court settlement. In these situations, you actually own the money.

A Self-Settled Trust (sometimes called a "d4A Trust") is set up for you by your parent, grandparent, or legal guardian, or by a court. To qualify, you must be under 65 years old and must have a disability that meets Social Security's standards. If your disability doesn't meet these standards, you cannot have this type of trust. The trustee of your trust can be anyone except you.

After you die, any money left in the Self-Settled Trust will be used to pay back the state for the total amount of money it spent on Medicaid benefits for you. If money is still left over after the state has been paid, the trustee will give it to whomever is listed to get the money after you die.

Pooled Special Needs Trusts

A Pooled Trust (sometimes called a "d4C Trust") can be set up by you, your parent, your grandparent, or your legal guardian, or by a court. This type of trust uses the assets from different people and puts them into a large investment fund. Although the funds are pooled (used together), you still have your own separate account. To have a Pooled Trust, you must have a disability that meets Social Security's standards and be under age 65 under the current rules in Illinois.

A Pooled Trust must be set up through a nonprofit organization. The nonprofit organization will administer the Pooled Special Needs Trust, take care of all the tax preparation, make investment decisions, and act as the trustee. Depending on how it is set up, after you die any money left in the trust may be used to pay back the state for the amount of money it spent on Medicaid for you.

Third Party Trusts

A Third Party Trust can be set up by anyone other than you, including your parent, your sibling, or your grandparent, or even by a friend, using their own money, including money coming as an inheritance directly from the person to the trust. As long as the trust is set up correctly (with money from other sources and not your own money), a Third Party Trust does not have to repay the government for any Medicaid expenses.

Parents usually set up and supply the money for Third Party Special Needs Trusts, often through their wills or revocable living trusts, and sometimes by purchasing life insurance payable to the trust. These types of trusts are often set up for a child with a disability, but they can also benefit a child or children (or other person or other people) without a disability. A parent can set up a trust for a child of any age, from a baby up to a senior. For example, a mother who is 90 years old could set up a trust for her 65-year-old daughter.

Other family members, such as grandparents, aunts, and uncles, can also put money into this type of trust. The only person who cannot place money into this type of trust is you, the person who will be the beneficiary of the trust.

Some parents place their property in a "living" trust and leave instructions that a separate trust will be created for their child upon their death. This type of trust is often effective immediately. Anyone can give money to the trust by writing a check, writing a will naming the trust as the beneficiary, or naming the trust as a beneficiary of assets.

If you get SSI, any money from a Third Party Special Needs Trust that is used for housing or food expenses could affect your benefits. Housing and food are considered "basic needs" under Social Security laws. If you are getting free housing or food from someone else, including a family member or a trust, your SSI benefits can be reduced or, in some rare cases, stopped.

Note: Money from an ABLE account that is used for housing or food will not reduce SSI benefits. An ABLE account can be used in combination with a Special Needs Trust. Learn more about ABLE accounts.

When creating a Third Party Special Needs Trust, whoever sets up the trust must decide who will get any assets that are left in the trust after you die.

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