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Demystifying Special Needs Trusts in Chicago

What is a Special Needs Trust? A Special Needs Trust, otherwise known as a "Supplemental Needs Trust," is a legal instrument that is established for the benefit of a person who is receiving, or will be receiving, means-tested government benefits, such as SSI (Supplemental Security Income) and/or Medicaid (health care coverage for people with relatively little income and assets).

What is an example of the use of a Special Needs Trust? Let's say that Grandma has a grandchild who was born with a disabling condition. Grandchild regularly needs expensive medical care. If Grandma's Will leaves money directly to Grandchild, Grandchild will have to use those inherited funds before being eligible for further government benefits. A good solution to this problem is for Grandma to have Grandchild's inheritance paid into a Third-Party Special Needs Trust. The trustee of the Trust will be able to use trust monies to purchase goods and services (i.e., "supplemental needs") for Grandchild that are not provided for through government benefits. As long as the trustee spends trust monies in an authorized fashion, Grandchild will continue to receive uninterrupted government benefits. Grandma can provide that if Grandchild does not survive the complete distribution of the Third-Party Special Needs Trust, the left-over cash and securities in the trust can be paid directly to other beneficiaries chosen by Grandma.

What is another example of the use of a Special Needs Trust? Let's say that Daughter receives government benefits, such as SSI and Medicaid. Mom dies with a Will that leaves monies directly to Daughter (i.e., not in a Third-Party Special Needs Trust ). Daughter essentially has two choices. First, she can accept the inheritance and use it for any purpose, but if she does, her access to SSI and Medicaid will be restricted for a period of time. In other words, Daughter will be penalized for having received the inheritance and using it for any purpose she desired. Second, the inheritance can be immediately deposited into a Self-Settled Special Needs Trust, otherwise known as a Supplemental Needs (d)(4)(A) Pay-back Trust. The Self-Settled Pay-Back Trust must provide that any monies left in the trust at the time of Daughter's death shall be paid to the government to the extent of the value of the government benefits provided to Daughter during her lifetime. While Daughter is living, the trustee may use trust monies to provide Daughter with goods and services (i.e., "supplemental needs") that are not provided for through government benefits.

It is very important that only authorized expenditures are made from the Special Needs Trust; therefore, it is critical that you appoint a trustee who knows, or is capable of learning, the technical rules related to government benefits and Special Needs Trusts.

Following are some important rules that must be adhered to during the administration of Special Needs Trusts. It is very important that the rules regarding distributions from Special Needs Trusts are followed. If the rules are not followed, you take the risk that Supplemental Security Income (SSI) and/or Medicaid benefits will be withheld for a period of time. To ensure that benefits continue uninterrupted, it is very important that you follow the rules regarding distributions from the Special Needs Trust.

First Rule: Generally, no trust monies should be distributed from the trustee directly to the beneficiary. When the trustee spends trust monies for the beneficiary's supplemental needs, the trustee must make payment directly to the provider of the goods and services. For example, if trust monies are used to purchase a television for the beneficiary, the trustee must not give money to the beneficiary to make the purchase. Rather, the trustee must pay trust monies directly to the store.

Second Rule: Trust monies must only be used for "supplemental" needs. That is, monies shall only be used for goods and services not provided for through Supplemental Security Income (SSI) and/or Medicaid. Those programs are designed to provide for primary needs. Special Needs Trust monies must only be used to satisfy supplemental needs. Following is a list of many, but not all, of the goods and services that typically may be purchased with Special Needs Trust monies:

  • television set
  • household furniture
  • transportation expenses
  • vehicle
  • vehicle insurance
  • exercise equipment
  • trips and vacations
  • eye glasses and contact lenses
  • education expenses
  • special dietary needs
  • out-of-pocket medical and dental expenses
  • life insurance premiums
  • materials for hobbies
  • tickets for events / movies
  • musical instruments
  • cosmetics
  • club memberships
  • home improvements
  • computer equipment
  • conferences / seminars
  • cable television
  • telephone and radio
  • cameras
  • entertainment
  • clothing
  • and many, many more

Illinois special Needs Trusts are complicated. It is critical that you work with a Chicago estate planning lawyer who has significant experience in advising clients on the intricacies of Illinois Special Needs Trusts, and who has prepared numerous Illinois Special Needs Trust estate plans.

The Wilmette, Glenview and Northbrook estate attorney of Sylvester Law Firm has such experience. We welcome you to call us at (847) 251-2999 to get answers to your important questions related to Illinois Special Needs Trusts.

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