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Protect your disabled heirs with special needs and payback trusts

If you or a loved one has a child or other heir that is mentally or physically disabled, then you may have major concerns about how to provide for that person once you are gone. Statistically, the odds of becoming disabled are much greater than the chance of an untimely death. Furthermore, the financial impact of disability can be far more devastating than death, as someone who is incapacitated will continue to require ongoing care for the duration of the disability.

One key component to planning for this unpleasant contingency could be drafting a special needs trust. This type of trust is similar to most other trusts in many respects, and is almost always used in conjunction with Supplemental Social Security income and Medicaid. Therefore, one of the main functions of the trust is to ensure that the funds it pays out do not coincide with benefits that are paid from the public sector. The assets of this trust also cannot exceed a specified amount, or the trust becomes defective.

Generally, special needs trusts can be funded with the same types of assets as most other trusts, such as cash, stocks and bonds, mutual funds, personal property, real estate and even life insurance. Cash value life insurance is in fact often used to fund these trusts, as many donors are not able to adequately provide financial support by any other means once they are gone. Annuities are also often used as an alternative investment if the grantor/donor is uninsurable.

Another type of irrevocable trust, called a “payback” trust offers the ability to bypass the standard Medicaid rules excluding benefits for those who had assets transferred to them any time in the 36 months before application. There is an exception written into the laws stating that any disabled person under age 65 can remain eligible for Medicaid as long as they transfer their assets to this type of trust. However, the law also mandates that upon the death of the disabled beneficiary, any remaining assets in the trust revert back to the state. This aspect of the trust differs from the special needs trust, which may have a remainder beneficiary.

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