Sources of Funding for Special Needs Trusts

Funding can come from a variety of sources. Among them:

1. The beneficiary’s savings and investments. If an individual acquired wealth prior to disability, then those assets may be placed in the trust.
2. Life insurance proceeds following the death of a parent, grandparent or other relative.
3. Litigation settlements. Many special needs trusts are established with proceeds from a litigation settlement, whether the settlement is a lump sum or a structured stream of income (e.g., an annuity).
4. Inheritance. Although good planning would likely involved the use of a third-party trust (a Supplemental Needs Trust), disabled individuals sometimes inherit funds directly. If property vests in the beneficiary, then a self-settled trust will be necessary.
5. Divorce settlements. Alimony and child support can be irrevocably directed to a special needs trust if the Court order provides that it must be paid to the trust.[1]

Most assets and income streams are assignable. Some are not. Non-assignable payments include:

• Temporary Assistance to Needy Families (TANF)/Aid to Families with Dependent Children (AFDC);
• Railroad Retirement Board-administered pensions;
• Veterans’ pensions and assistance;
• Federal employee retirement payments (CSRS, FERS) administered by the Office of Personnel Management;
• Social Security title II and SSI payments; and
• Private pensions under the Employee Retirement Income Security Act (ERISA) (29 U.S.C.A., Section 1056(d)).[2]

Additions to trust principal made directly to the trust are not income to the grantor, trustee or beneficiary. Exceptions to this rule are listed in SI 01120.200G.1.c. and SI 01120.200G.1.d.[3]

Notes:

1. POMS SI 01120.200.G.1.d provides: A legally assignable payment (see SI 01120.200G.1.c. for what is not assignable), that is assigned to a trust/trustee, is income for SSI purposes unless the assignment is irrevocable. For example, child support or alimony payments paid directly to a trust/trustee as a result of a court order, are not income. If the assignment is revocable, the payment is income to the individual legally entitled to receive it.

2. POMS SI 01120.200.G.1.c