A special needs trust may be established for the benefit of a person with special needs or disabilities. The trust may cover various expenses, and many beneficiaries use it to help pay for their education.
A special needs trust may be used to cover the costs of education expenses, such as textbooks, tuition, and academic fees. Generally, the trustee pays for these things directly. Money from the trust often is not counted as the beneficiary’s income, which is important if they apply for programs like Medicaid. If you are unsure how to establish a special needs trust or need help with trust administration, contact our legal team for help.
Contact our Henderson, NV trust administration lawyers for a free, confidential legal assessment by calling Flake & Flake at (702) 829-5731.
What is the Purpose of a Special Needs Trust?
A special needs trust is a trust established for the benefit of a person with disabilities or special needs. The trust may help pay for the beneficiary’s expenses without disqualifying them from government programs, like Medicaid. Often, parents and families will establish a special needs trust for a child or family member with a disability to help them care for themselves and live more independently.
How a Special Needs Trust Can Help Pay for School or College in Nevada
A special needs trust can help cover education costs without disqualifying the beneficiary from government assistance or aid programs. The trustee may help pay for expenses including, but not limited to…
- Tuition
- Textbooks
- School fees
- Laptops
- General school supplies (e.g., paper, pens, binders)
- Transportation to and from classes
Who Actually Pays for School from a Special Needs Trust?
Generally, the trustee pays for school or college expenses directly. The funds do not pass through the beneficiary. While this might seem a bit cumbersome, it helps protect the beneficiary.
When cash is distributed directly to the beneficiary, it may be flagged as income, especially by Medicaid. If the trustee pays for school expenses directly, it may not count as the beneficiary’s income.
How to Set Up a Special Needs Trust
Nevada generally recognizes 3 different types of special needs trusts.
Third-Party Trust
A third-party trust is established and funded by people other than the beneficiary, often the beneficiary’s parents and other family members. There is no age limit to this kind of trust, and anyone of any age may be named as the beneficiary. This kind of special needs trust often comes up when parents plan their child’s future.
First-Party Trust
A first-party trust is established with the beneficiary’s own assets, including settlement money, inheritance, and personal income. For example, if a person becomes disabled after an accident, they may receive a settlement which they may use to establish a special needs trust. The beneficiary of a first-party trust must be under 65 when the trust is created.
Pooled Trusts
A pooled trust may involve more beneficiaries than just your child or loved one. Often, non-profit organizations will combine money and assets from multiple people living with disabilities into a single trust. The trust may then help pay for multiple people’s expenses. Because multiple people contribute, this shared trust is often larger than other trusts.
Are There Spending Limits for Special Needs Trusts?
There is no statutory cap on the trust’s spending. However, when more than $5,000 is distributed, the trustee must immediately inform the Division of Welfare and Supportive Services (DWSS).
The money is not automatically considered income just because it exceeds $5,000, but trustees must show it was used solely for the beneficiary and explain how it was used. If the money was not used solely for the beneficiary’s benefit, a transfer-of-assets penalty may apply.
Can a Special Needs Trust Pay for College Dormitories or Housing?
A special needs trust may be used to pay for the beneficiary’s housing needs at college, such as living in the dorms. However, this may be considered a “shelter expense,” which counts as “In-Kind Support and Maintenance” (ISM). ISM expenses may reduce monthly Social Security Income (SSI) benefits.
How Much Money Should You Place in a Special Needs Trust?
The amount of money you should place in a special needs trust varies depending on the goals of those establishing the trust. If the trust is meant to cover a lifetime of the beneficiary’s expenses, you may consider placing about $100,000 in the trust, possibly more. Ultimately, consider how much you believe college will cost when establishing the trust.
Can a Special Needs Trust Pay for Food and Meal Plans at College?
Yes. A special needs trust may pay for food and meal plans at college. In the past, food was considered an ISM expense and could be used to reduce SSI benefits. However, food is no longer considered an ISM expense according to updated Social Security rules.
Can a Special Needs Trust Cover Ordinary Grocery Costs?
A special needs trust may be used to pay for groceries, but the beneficiary may not be given the money directly. Instead, the trust must pay for groceries directly, and the money never passes through the beneficiary.
Rather than conducting complicated banking transactions between the trust and the grocery store, a trustee may set up a trust debit card that the beneficiary can use whenever they go grocery shopping.
Are There School or College Expenses a Special Needs Trust Cannot Pay For?
Possibly. Social Security rules may deem some costs as ISM expenses. While these costs can still be covered, they may be used to reduce SSI benefits.
Also, the person or people who created the trust may limit how it can be used. For example, some trusts limit expenses the grantors deem frivolous or unnecessary. For example, the beneficiary may be able to pay for paratransit services to get to and from classes but not luxury car rides. If it is unclear whether certain expenses are allowed, our Nevada trust administration lawyers will review the trust’s rules with you.
Who Pays Taxes on a Special Needs Trust in Nevada?
Nevada does not impose a state income tax on special needs trusts earnings or distributions. However, the trust and any beneficiary who receives distributions may still face federal income taxes.
Taxes for special needs trusts will vary based on whether the trust is a first- or third-party trust. Ideally, any money used to pay for school expenses, including college tuition, will be paid directly from the trust and should not be considered part of the beneficiary’s income.
Should You Talk to a Lawyer Before Using a Special Needs Trust to Pay for College?
Yes. College is a major expense, and you and your lawyer should develop a plan for how the trust will be used. An attorney can work with you and the trustee to make sure the trust is properly administered and that all necessary expenses for school are covered with minimal tax or other financial obligations.
Contact Our Nevada Trust Administration Attorneys for Help Today
Contact our Las Vegas, NV real estate lawyers for a free, confidential legal assessment by calling Flake & Flake at (702) 829-5731.
