A primary goal of asset planning for a child with disabilities or other special needs is to ensure that the child will remain qualified and eligible to receive need-based public benefits, whether now or in the future, while at the same time retaining control over the child’s assets or any assets given to the child. Need-based benefits include federal Supplemental Security Income (SSI) and state-administered Medicaid. To be eligible for need-based assistance such as SSI and Medicaid, a person with a qualifying disability may only have limited assets (generally less than $2,000, excluding certain exempt assets such as a home and personal effects) and limited income.

Many states, including Illinois, have enacted legislation allowing a grantor to create a trust for a disabled beneficiary that will not be counted among the beneficiary’s assets, income, or other resources in determining the beneficiary’s eligibility for need-based public benefits. These trusts are often referred to as Special Needs Trusts. In general, there are two types of Special Needs Trusts: (1) Third Party Special Needs Trusts and (2) Special Needs Payback Trusts.

Third Party Special Needs Trusts (“Third Party SNTs”) are created and funded by the special needs child’s parents, grandparents, or other third parties. Assets in Third Party SNTs are used to supplement the child’s quality of life or care by providing goods or services that are not covered by government benefits; the funds are available only to pay for goods or services that the government is unwilling or unable to provide, including expenses incurred to enrich the child’s life and make it more enjoyable.

Special Needs Payback Trusts, also known as OBRA ’93 Trusts (“Payback Trusts”), are funded with assets owned by the special needs child in his or her own name. For example, if a special needs child receives a personal injury or medical malpractice settlement, or inherits assets directly (rather than into a Third Party SNT), a Payback Trust can be created to hold those assets without jeopardizing eligibility for public benefits. Like Third Party SNTs, Payback Trusts can be used to enhance the quality of the special needs child’s life by providing goods and services that are not covered by government benefits. Unlike Third Party SNTs, however, if assets in a Payback Trust remain at the child’s death, those assets may be subject to reimbursement to the state for any benefits provided during the child’s life.

Both types of Special Needs Trusts must be carefully drafted to comply with applicable laws. Failure to satisfy the requirements of these laws could disqualify the child for need-based public benefits. Our office would be happy to assist you with asset planning for the special needs child in your life.