How Are The Trust Funds Different
Even though these two funds are distinct and pay for different benefits, together they are often referred to as the Social Security Trust Fund. One pays for disability and the other pays retirement and survivor benefits.
Social Security trust funds are different from other trust funds, because in the private sector these funds are invested in real assets that can range from stocks to bonds or other financial tools. The Social Security funds are invested in a special type of Treasury bond that can only be redeemed by the Social Security Administration. The government is basically creating an IOU from one of its accounts to another with this type of bond.
Does The Beneficiary Have Control Over The Assets Or Money
No. While a Texas special needs trust is created for the benefit of the beneficiary, the beneficiary cannot access the trust funds or demand the use of trust funds in a certain way.
The Special Needs Trust requires a named trustee. The trustee is responsible for make disbursements on behalf of the beneficiary but not to the beneficiary.
Distributions must be made on behalf of the beneficiary for bills, such as phone bills, utilities, transportation clothing, education, travel, and entertainment.
The beneficiary never has direct control over the money or property in the trust.
Requirements For A Disability Trust
The first requirement for a trust to be considered a qualified disability trust under IRS law is that all the beneficiaries of the trust must be defined as disabled according to the Commissioner or Social Securitys standards.
In other words, the beneficiaries must fall under the category of legally disabled. The simplest means of ensuring this requirement is met is to verify that each beneficiary is registered for and receiving Social Security assistance for medical and living expenses.
The second requirement is that the trust must be irrevocable. This means that any assets placed into the trust can never be removed by the trustor. Also, the trust can never be canceled or even controlled by the trustor.
Instead, a trustee is in charge of all distributions, investments, and supervision of the disability trust. An irrevocable trust also requires that income tax be paid for the value of all assets deposited into the trust. So, if you deposit $10,000 worth of assets into the trust, either the trustor or the trustee must pay the income taxes for that amount.
The third requirement is that the trust is solely established for the benefit of the disabled beneficiary. In other words, the only person who may receive funds from the trust are the disabled beneficiaries.
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How The Trust Works
Like all trusts, a special needs trust is organized around the people in three roles:
- a settlor who creates the trust and provides the money
- a beneficiary , and
- a trustee, who manages the money for the sole benefit of the beneficiary.
The trust can be set up while parents are alive, or it can come into being at their death, through provisions in the parent’s will. Typically, the parents choose someone who knows the beneficiary wella sibling or close family friendto serve as trustee.
What Is A First Party Special Needs Trust
A First Party Special Needs Trust is established with funds from the person with a disability. They act as both beneficiary and grantor. Often a first party trust is set up with an inheritance that is already in the beneficiarys name or an accident settlement.
First Party Special Needs Trust requires that any funds remaining in the trust at the time of the beneficiarys death be used to repay the costs of government benefits.
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Disability Insurance Trust Fund
The Disability Insurance Trust Fund is a separate account in the United States Treasury. A fixed proportion of the payroll taxes received under the Federal Insurance Contributions Act and the Self-Employment Contributions Act are deposited in the fund to the extent that such taxes are not needed immediately to pay expenses. Taxes are deposited in the fund on every business day.
The trust fund provides automatic spending authority to pay monthly benefits to disabled-worker beneficiaries and their spouses and children. With such spending authority, the Social Security Administration does not need to periodically request money from the Congress to pay benefits.
Funds not withdrawn for current cost are invested in interest-bearing Federal securities, as required by law the interest earned is also deposited in the trust fund.
The Disability Insurance Trust Fund was created with passage of the Social Security Act Amendments of 1956. DI became effective on January 1, 1957.
The Board of Trustees currently consists of 6 members, 4 of whom automatically serve by virtue of their positions in the Federal Government. These 4 are the
- Secretary of the Treasury ,
- Secretary of Labor,
- Secretary of Health and Human Services, and
- Commissioner of Social Security
Easy Ways To Fix The Trust Fund Shortfall
Youre probably wondering what we could do now to prevent total trust fund depletion in the future. There are several math changes the SSA can try on Disability Insurance trust fund payments. These tactics rely on Congress taking some kind of legislative action. They include:
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Create The Trust Document
After deciding who will serve as trustee and naming an advocate, the next step is to meet with a special needs planning or elder law attorney to create the trust document.
It is important for individuals or families creating a special needs trust to work with a knowledgeable attorney. These are complex legal documents that should be custom-tailored to a familys unique needs.
While undoubtedly DIY options exist out there, these generally fail to consider the unique aspects of a familys needs. These may not satisfactorily address all concerns.
For example, if the trust is not set up correctly, or the trustee makes unqualified distributions out of the trust, it may affect the beneficiarys eligibility for benefits. This ultimately would defeat the purpose of creating the trust, as the beneficiary could lose their government benefits.
What Is The Effect Of The Gifting Concession
Any gift to an SDT must be unconditional and made without expectation of receiving any payment or benefit in return.
To prevent a beneficiary from putting their own property into an SDT, compensation received by or on behalf of the principal beneficiary cannot be contributed to the trust.
A gifting concession can be claimed by certain contributors to the SDT. The effect of the gifting concession is that the gift is disregarded for the purposes of the contributors social security means testing.
The gifting concession can be claimed by:
- Immediate family members of the beneficiary who are at, or over, age or service pension age and are receivinga pension and
- Immediate family members who are within 5 years of age pension age or over age service pension age and are not on a pension may still contribute to a Special Disability Trust and take advantage of the gifting concession later when reaching qualifying age, provided the gifting concession has not been fully used.
Immediate family members are:
- Parents of the beneficiary
- Legal guardians of a minor beneficiary, or people who were legal guardians of the beneficiary when the beneficiary was a minor
- Grandparents of the beneficiary and
- Brothers and sisters of the beneficiary .
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What Happens If That Money Runs Out
The Congressional Research Service recently answered this very question. If the trust funds run completely out of money, the SSA wouldnt stop issuing disability and retirement benefits right away. It just means that incoming tax revenue could only pay about 79% of benefit payments already scheduled to go out.
If one trust fund became depleted and tax money coming in didnt cover current expenses, something really interesting would happen. It would create a conflict between two federal laws. Under the Social Security Act, beneficiaries would still be legally entitled to receive their benefits in the full, scheduled amounts. However, another federal law called the Antideficiency Act prohibits the government from spending trust fund money it doesnt already have. As a result, the SSA would have no legal authority to pay full Social Security benefits on time.
If either trust fund becomes depleted, that doesnt stop more tax revenue from coming in. This tax money will pay for most scheduled benefits the SSA owes to qualified retirees. What about the rest like your monthly SSD checks? The SSA has a couple of options:
- Pay full benefits on a delayed schedule.
- Make benefit payments on time as scheduled, but for a lower amount.
First Party Special Needs Trust
A First Party SNT is used if you have accumulated many assets, inherited assets, or received assets from a court settlement.
It used to be that people with disabilities were not allowed to set up their own First Party SNT, even though it was their own money. A parent, grandparent, guardian, or court had to set up the trust, the trustee controlled the funds, and you could not be your own trustee. The laws changed in 2016, and this type of trust can now be set up by you, or by your parent, grandparent, legal guardian, or the court.
To qualify, you must be under 65 years old and must have a disability as defined by Social Security. If you are not disabled enough to qualify for Social Security, you cannot have this type of SNT.
The SNT has to specify that after you have died, any assets left in the SNT must be used to pay back the government for what they paid in Medi-Cal for you after the SNT was set up.
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Third Party Special Needs Trusts
Parents usually set up and provide the money for Third Party Special Needs Trusts, often through their will, and sometimes by purchasing life insurance payable to the trust. Other family members can also put money in this type of SNT, such as grandparents, aunts, and uncles. The only person who cannot place money into this type of trust is you, the person with a disability.
Some parents place their property in a “living” trust and state in that trust that a separate SNT for their disabled child is set up. This type of SNT becomes effective immediately and is a good idea for families where aunts, uncles, and grandparents might want to leave money to the SNT. Anyone can give money to the SNT by either writing a check or writing a will naming the SNT as the beneficiary.
Note: You do not want your relatives giving money directly to you as this may lower or stop your SSI, Medi-Cal, IHSS, and HUD housing assistance.
The key to a Third Party SNT is that the money cannot be used for housing or food. 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 an SNT, then there will be a penalty and your public benefits will be lowered or stopped. This is why you dont want to use assets from the SNT for housing or food.
How Do You Set Up A Family Trust Fund
To establish a trust fund, there is a series of steps to typically follow. Below is an example of some of the steps involved in setting up a family trust in Australia:
1. Decide on the trust assets
List all the holdings , to be placed in the trust, along with their holding value.
2. Choose a trustee
Selecting a trustee is an important element in establishing any trust, including a discretionary trust. The trustee will need to manage the trust in accordance with the terms set out in the trust deed. A trustee can be an individual, several individuals or a company. It is a good idea to consider an independent trustee, as conflicts of interest can arise if the trustees of a family trust are related to each other and are beneficiaries of the trust.
3. Determine the beneficiaries
Compile a list of people or entities who you want to be entitled to receive benefits, such as your children or grandchildren. Youll also need to decide what sort of entitlement you want the beneficiaries to receive whether it is a percentage, a fixed amount or at the trustees discretion.
4. Draft a trust deed
5. Settle the trust
6. Sign the trust
After the trust is signed by the settlor, the trustee or trustees must hold a meeting agreeing their appointment as trustee and accepting to be bound by the terms of the trust deed.
7. Pay stamp duty if you need to
8. Create a name for your trust
9. Apply for an ABN and TFN
10. Set up a bank account
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Reasons To Consider A Special Needs Trust
In my last article, I outlined the benefits of ABLE accounts. For many families, ABLE accounts sufficiently meet their desire to provide assets for special needs family members. In higher net worth families, ABLE accounts are the first step in structuring a long-term financial plan for someone living with a disability. Oftentimes, the next step is to create a Special Needs Trust structure to hold current assets or receive funds a disabled beneficiary may receive in the future.
A special needs trust is designed to hold and protect financial assets for the benefit of a disabled beneficiary. The trust is a legal structure used to collect and manage the assets and may receive contributions from a variety of sources, including assets gifted from family members during their lifetime. A special needs trust is frequently established to receive assets from a legal settlement, especially if the recipient is a minor. Other special needs trusts are established via an estate plan when parents or other family members want to provide assets or life insurance proceeds at their own death as an inheritance for someone with special needs.
How Does A Special Needs Trust Work
When a Beneficiary needs something to be paid for, a Request For Distribution form is completed and sent into Wispact. Then Wispact reviews the RFD to ensure the distribution is legal and will not interfere with the Beneficiarys ability to receive means-tested public benefits. The RFD is then sent to the Trustee for payment to the approved service or product provider. To see an infographic explaining how SNTs work, please visit the Wispact Trusts page.
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Individual Vs Pooled Special Needs Trust
When you create your special needs trust, youll need to consider whether you want an individual trust or a pooled trust. Knowing what these terms mean will help you understand the different types of special needs trusts.
An individual trust, also known as a D4A trust, gives an individual person the power of trustee. If Medicaid recovery is more than the trust, all of the remaining funds will go to Medicaid. An individual trust is typically a more expensive option than a pooled trust because it takes a longer amount of time to create. However, some cases require an individual special needs trust instead of a pooled trust.
A pooled trust, also known as a D4C trust, gives a 501 or nonprofit association the power to act as a trustee, while an appointed trust beneficiary advocate of your choosing may act as a liaison. If Medicaid recovery is more than the trust, the charity retains the extra funds to serve future clients and fund its operation. One benefit to this is that a pooled trust may cost only a fifth of the fees needed to administer an individual special needs trust, and it is quicker to establish. Many cases can take advantage of a pooled trust, and charities like the CPT Institute can help you determine if this type of trust will fit your needs.
So What Do I Do First
Doing a trust is usually part of your estate planning. So, sometimes parents just havent done any estate planning. So, thats why they dont have a trust. It is important to take a look at your estate planning and get that done. For any parent, but particularly a parent of a special needs child, you want to address if your children are still minors, guardians, as well as a special needs trust. Then the next step you need to do is to take a look at your beneficiary designations and your financial and insurance planning.
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