Special Needs Trusts - Which One is Right for You?
Estate planning for parents with children with disabilities involves many challenges. The planning is not just for the life and death of the parents, but also for the life and death of the disabled child. Among the challenges parents have are:
How do I protect my child from losing public benefits - such as Medicaid or SSI?
How do I make sure sufficient resources exist to meet my child’s needs when I am gone?
How do I make sure those resources are properly managed?
How do I address the needs of my other non-disabled children?
Often, parents of children with special needs will try to resolve these issues by disinheriting the disabled child and leaving their estates to their other children. This approach is flawed for a number of reasons.
First, public benefits programs are often inadequate. They need to be supplemented with other resources.
Second, both public benefits programs and individual circumstances change over time. What’s working today, may not work tomorrow. Other resources need to be available, just in case.
Third, relying on one’s other children to take care of their siblings places an undue burden on them and can strain relations. It can be unclear whether inherited money belongs to the healthy child to spend as he pleases, or whether he must set it aside for his disabled sister. If one child sets money aside, and the other doesn’t, resentments can build and cause dissension.
A better approach is the creation and implementation of a trust sometimes referred to as a “Special” or “Supplemental” Needs Trust. A Special Needs Trust is a Trust designed to receive and manage assets for a person with a disability, while maintaining eligibility for governmental benefits. The Trustee will have full control and discretion over distributions. The distributions from the Trust are to “supplement” government benefits and provide for “special needs” that enhance quality of life. “Special needs” can include medical and dental expenses, annual check-ups, desirable equipment (such as, a specially equipped van), training and education, insurance, transportation, and essential dietary needs. It may also include spending money, electronic equipment, computers, vacations, movies, payments for a companion, and other quality of life-enhancing expenses.
There are three types of Special Needs Trusts
A first-party special needs trust.
A pooled special needs trust.
A third-party special needs trust.
First-party SNTs, sometimes referred to as “(d)(4)(a) trusts” are self-settled trusts funded with the disabled individuals assets. These are most often used when the person with a disability inherits money or property outright, or receives a court settlement. They can also be useful when a person with assets becomes disabled and needs to qualify for public benefits. A first party SNT must be created and funded before the beneficiary turns age sixty-five (65). A first-party SNT can be established by the beneficiary’s parent, grandparent, legal guardian, a court, and a mentally and legally competent SNT beneficiary. The first-party SNT must specify that upon the death of the beneficiary, all amounts remaining in the SNT (up to the total lifetime medical assistance benefits paid on behalf of the beneficiary by Medicaid) are first repaid to the state Medicaid program. Any remaining balance, after the Medicaid payback, can be distributed to remainder beneficiaries.
A pooled trust, sometimes known as a “(d)(4)(C) trust” is a special needs trust established by a non-profit organization, with individual beneficiaries creating accounts within the larger trust. Transfers into a pooled trust, like transfers into a first-party special needs trust, do not prevent a person with special needs from accessing government benefits. However, there can be a penalty period for an individual over 65 years of age in certain states. What happens with the account after the death of the beneficiary depends on whether it was self funded or funded by a third-party. If it was self funded, the assets will likely remain in the trust or be used to reimburse the state Medicaid program.
A third-party trust is created by a third-party planning in advance for a person with special needs. Typically, this is the parents of the disabled individual, but any person, other than the beneficiary, may establish the trust. Third-party SNTs can be a testamentary trust that springs into existence from a Will or Living Trust. They can also be drafted as a stand-alone trust. Third-party SNTs are usually funded following the death of the individual who established the trust. A stand-alone trust may be more helpful if there are multiple persons who wish to fund the trust. A stand-alone SNT can receive gifts from grandparents, siblings, friends or even the person establishing the trust, prior to the death of the person who created the trust. Upon the death of the disabled beneficiary, any assets remaining in the trust may be distributed to the remainder beneficiaries identified in the trust.
Special needs trusts can be a great vehicle to meet the goals of protecting public benefits, providing sufficient resources, properly managing those resources, and not unduly burdening the other children. Which trust is right for you will depend on your situation. Special needs trusts are sophisticated planning instruments and should be implemented only in consultation with a qualified attorney.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.