In most cases, money in a special needs trust fund is treated the same as money in any trust fund. It is reported as an asset of the beneficiary on the beneficiary’s Free Application for Federal Student Aid (FAFSA). There are, however, a few nuances and exceptions.
Special needs trusts (also called supplemental needs trusts) are designed to provide money and/or property to a disabled beneficiary without affecting the beneficiary’s eligibility for Supplemental Security Income (SSI) and Medicaid. Congress established the loopholes used to establish special needs trusts by amending 42 USC 1396p in the Omnibus Budget and Reconciliation Act of 1993 [P.L. 103-66]. The beneficiary of a special needs trust does not have access to or control over the money in the trust fund. The trustee may not give money directly to the beneficiary, but may spend the trust funds on goods and services for the benefit of the beneficiary, as specified in the terms and conditions of the trust.
Although the beneficiary does not have access to the money in a special needs trust, the money in a special needs trust must still be reported as an asset of the beneficiary on the beneficiary’s FAFSA and other financial aid forms. The restrictions in a special needs trust are the result of a voluntary restriction imposed by the grantor. Also, most special needs trusts allow the trustee to spend the money in the trust for the beneficiary’s education.
Money in a special needs trust, however, is not reported as an asset on the FAFSA of the beneficiary’s sibling. The special needs trust is considered an asset of the beneficiary. Only assets of the student and a dependent student’s custodial parent(s) are reported as assets on the student’s FAFSA. Sibling assets are disregarded.
The CSS/Financial Aid PROFILE form, however, requires applicants to report the assets of siblings. So, a special needs trust would be reported as an asset on the PROFILE of the beneficiary’s sibling.
If the money in a special needs trust is reported as an asset on a financial aid form, the family should ask the college financial aid administrator for a professional judgment review. Some financial aid administrators will use their discretion to ignore the money in the special needs trust; most will not. However, the financial aid administrator can make adjustments for the high dependent care costs of a special needs child, such as reducing the parent’s income by the amount of unreimbursed expenses for the special needs child.
Achieving a Better Life Experience (ABLE) accounts, however, may be an exception to the treatment of special needs trusts for federal student aid purposes. ABLE accounts were established by the Tax Increase Prevention Act of 2014 [P.L. 113-295] to allow families to save money for disability-related expenses of a disabled beneficiary to supplement but not replace eligibility for SSI, Medicaid and other means-tested federal benefit programs. ABLE account balances of $100,000 or less are disregarded when determining the beneficiary’s eligibility for other federal means-tested benefit programs. ABLE accounts would also not be reported as an asset on a sibling’s FAFSA because the beneficiary is considered to be the owner of the ABLE account, not the parent.