Estate Planning for Special Needs or Disabled Individuals
Families with a child with any type of disability such as Autism, Down's Syndrome, Muscular Dystrophy, or other catastrophic illness that makes it difficult for him or her to handle money should consider planning for that disabled child. If you have a child or loved one with a disability or special needs, Special Needs LLC can assist you in preparing an individualized plan to meet your unique needs.
What is a Special Needs Trust?
"Special Needs" Defined
Does the Social Security Administration allow Special Needs Trusts?
Who can establish a Special Needs Trust?
Who will manage the trust assets?
Who can serve as trustee?
Can the disabled person serve as trustee?
What is placed in the trust to establish it?
Can additions be made to the trust?
Are Special Needs Trusts private?
Why do I need a Special Needs Trust?
When should you set up a Special Needs Trust?
Ways to fund a Special Needs Trust
What additional needs arise if both parents die?
The advantages of a Special Needs Trust
The disadvantages of a Special Needs Trust
What is a Special Needs Trust?
A Special Needs Trust ("SNT")is a special kind of trust which holds title to property for the benefit of a child or adult who has a disability. The Special Needs Trust can be used to provide for the needs of a disabled person supplement ing benefits received from various governmental assistance programs including SSI. A trust can hold cash, personal property, real property, or life insurance proceeds.
"Special Needs" Defined
Special needs refers to the requisite s for maintaining the comfort and happiness of a disabled person when such requisites are not being provided by any public or private agency. Special needs can include medical and dental expenses, annual independent check-ups, equipment, programs of training, education, treatment, and rehabilitation, eye glasses, transportation (including vehicle purchase), maintenance, insurance (including payment of premiums of insurance on the life of the beneficiary), and essential dietary needs. Special Needs Trusts may also include spending money, electronic equipment such as radios, CD players, television sets, and computer equipment, camping, vacations, athletic contests, movies, trips, money to purchase appropriate gifts for relatives and friends, payments for a companion, and other items to enhance self-esteem.
Does the Social Security Administration allow Special Needs Trusts?
In 1975 the Social Security Administration established rules allowing assets to be held in trust for a recipient of SSI as long as the disabled beneficiary cannot control the amount , frequency of trust distributions or revoke the trust to use the trust assets for his or her personal benefit. The Social Security Administration's handbook Understanding SSI states: "A trust can be set up for an SSI beneficiary."
Who can establish a Special Needs Trust?
Parents (or other family members) of a disabled child can establish a Special Needs Trust as part of their general estate plan. The parents can "pour-over" that child's share of their estate into this special trust and not worry that their child will be prevented from receiving benefits as a result of this income influx due to the inheritance.
A disabled person who expects an inheritance or other large sum of money may establish a Special Needs Trust. Direct receipt of these funds might otherwise disqualify them from public benefits. In some situations, a trust can also be established after the disabled person has received an extraordinary amount of money (though a court order may be necessary).
Who will manage the trust assets?
The manager of a trust is called a "trustee." It can be any person over eighteen years of age -- a parent or loved one, a bank, a financial planner, CPA , or a professional fiduciary. The trustee holds, administers, and distributes all property allocated to the trust for the disabled person during the beneficiary's lifetime.
Who can serve as trustee?
In most circumstances, when a Special Needs Trust is established by parents for the benefit of a disabled child, those parents serve as the trustee until they die or become incapacitated. When that event occurs, a successor selected in advance by the parents or person establishing the trust continues to serve according to instructions contained in the trust. The successor trustee is usually a family member or close family friend. While this is common for most special needs trusts, we highly recommend using a corporate co-trustee such as a bank or an institutional administrator such as a trust company. The reason for this is to help your family members or loved ones make the right decisions along the way. The corporate trustee canl help guide your family members in their decisionmaking as the laws change and new forms or new tax laws take effect which might impact the special needs trust (and your trustees). In addition, the trust is required to file tax forms every year.
Can the disabled person serve as trustee?
No. The whole premise of a Special Needs Trust is that the disabled beneficiary shall not have access to principal or income of the trust. The assets of the trust are for the benefit of the disabled person. However, the disabled person has no power or authority to direct the payment of funds.
What is placed in the trust to establish it?
Any kind of asset may be held by the trust. Holding title by the trust is a simple process of putting the title to that asset in the trust's name. Many times a trust has no assets put into it until the death of the settlor. The Special Needs Trust in that case is an empty shell waiting for a future event. It is prudent to place some assets into the trust and begin using the trust immediately, but it is not required.
Can additions be made to the trust?
Yes. Additional property may be added to the trust at any time by the settlor or any other person. Additions may be made by gifts during life, by will or living trust, as well as disbursements from life insurance policies, employee plan benefits, or retirement plan benefits.
Are Special Needs Trusts private?
Yes. If the settlor desires, the trust can remain confidential to all persons.
Why do I need a Special Needs Trust?
Having a Special Needs Trust protects your child(ren) from losing government benefits to which s/he may be entitled. Laws change frequently -- therefore SNTs have become a staple in estate planning for any family with a disabled child(ren). Establishing a special needs trust is one of the best strategies in providing financial security for persons with a disability and/or victims of personal injury. A well-drafted SNT makes it possible to set aside funds - such as a gift, inheritance, or a legal settlement - for a disabled or injured person without jeopardizing that person's current or future government (federal and state) benefits.
By prohibiting such funds from being used to pay for food, clothing, and shelter - necessities usually covered by government assistance - these funds can be used to supplement government benefits, not replace them. Since the special needs trustee is given sole and absolute discretion over the management and distribution of the funds, these funds can be used to pay for items designed to enhance the quality of life of the beneficiary -- wheelchairs, handicap-accessible vans, mechanical beds and personal attendants, as well as recreational and cultural experiences.
When should you set up a Special Needs Trust?
Parents should consider setting up a Special Needs Trust when they are young. Since most SNTs are funded with life insurance, the younger and healthier you are, the less expensive it is to fund the trust. However, some families or single parents can not afford to budget for life insurance and special needs planning until later in life. Planning later in life poses several problems:
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Life insurance is more expensive the older you are;
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You really cannot predict how healthy you'll be in the future;
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If you do not have a SNT in place, grandparents, aunts, uncles and other relatives do not have a way to leave assets to your child(ren) without jeopardizing your child's government benefits, unless they themselves create a trust for your child(ren) within their own estate plan;
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Procrastination is not an asset -- it is a liability when it comes to something this important;
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You need to plan for your child's final arrangements. As difficult as it is, you would not want to burden someone else with it;
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If you have gotten this far, you should start planning today.
Some families begin their future planning activities with the preparation of a simple will. If their child with a disability will likely have long-term medical or support needs, the SNT can be a vehicle to supply the funding to provide a lifetime of quality care. Even if the future prognosis of your child is unclear, it is never too early to put plans in place for contingencies to care for your family or child in the event of a parent's sudden death or disability.
Ways to Fund the Special Needs Trust
While many parents of a child(ren) with special needs have done some basic estate planning, few have done very comprehensive special needs planning. Some parents have wills, living trusts, and some even have special needs trusts. Legal documents alone will not guarantee that the money will be there, or that there will be enough of it to meet the long-term care needs of the child with special needs.
A simple will is better than no will at all. A will is not the solution in most special needs planning situations. A living trust is not enough. A special needs trust, even if correctly drafted, is not enough if not coordinated and integrated with other legal documents or with all the financial assets.
Parents never want their child(ren) to be a financial burden on a sibling/ guardian or caretaker. A well-designed estate plan, when coordinated with a properly funded special needs trust, can help parents plan for the financial future of their child(ren) with special needs. If structured by knowledgeable special needs professionals, assets can pass to a special needs trust and not count towards the $2,000 SSI limits for an individual, which means that government benefit eligibility will be maintained and money can be used to supplement the lifestyle of the individual with special needs. The trustee must make certain that the money is used for supplemental purposes only. An important part of special needs planning is to guarantee that a mechanism is set up to provide "enough" money to meet long-term needs. Because the responsibility of the successor trustee is quite complicated we always recommend that parents choose a personal trustee (such as a family member or a close relative) to serve as a co-trustee with a corporate trustee (such as a bank or a trust company) that specializes in handling these types of trust. The laws change annually in some cases and the tax and ineligibility laws must be monitored to prevent unintended complications from arising within the trust and its administration. That being said, it would be extremely difficult for a non-professional to keep abreast of the myriad changes in these laws. Once the trust is funded, the guardian should seek the professional's guidance in handling the responsibilities involved.
When choosing a corporate trustee you should give the successor trustee (a family member or close family friend) the ability to replace the corporate trustee (or bank/ money manager) if their performance is unsatisfactory or contrary to the beneficiary's best interest.
Let's review some of the different ways to fund a special needs trust:
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Real estate: These properties are not liquid assets and, due to market fluctuations, there are no guarantees that the money will be there when needed. Real estate is frequently left to meet residential needs; however, upkeep, maintenance, and staffing issues are often overlooked in the planning stages. Real estate is rarely the primary funding vehicle for a special needs trust.
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Stocks, bonds, and mutual funds: Like real estate, market fluctuations can jeopardize the guarantee of providing sufficient cash when needed. While the stock market has historically enjoyed large returns, there are no guarantees that such a trend will continue or that a market downturn will not occur when the money is needed. Therefore, stocks, bonds, and mutual funds are often used when funding a special needs trust, but they are rarely the primary funding vehicle.
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Pensions and retirement funds such as IRAs, Roth IRAs, 401(K) plans, and 403(b) tax deferred annuities: Since these plans are designed for retirement, using them to fund a special needs trust may compromise that retirement, unless of course death occurs before retirement. Therefore, this strategy is not generally recommended as a primary funding source, unless there are no other methods available to fund the special needs trust. Another consideration associated with the use of retirement funds is that the proceeds cannot be deferred or rolled over into another qualified pension plan, resulting in fully taxable income and larger tax bills.
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Various forms of life insurance: Life insurance is an excellent funding source for a special needs trust because the money by definition will be available when the parent(s) are gone. Premiums can be budgeted and insurance amounts can be selected to meet the needs of each and every situation. Death benefits are usually probate free and income tax free. Various types of life insurance are used in different situations and for different purposes. The parent of the child with special needs will want to consider not only how much life insurance to buy but whether individual, joint (first to die) or second to die coverage will best meet the needs of the child with special needs as well as those of the other family members (such as, how much would one parent's income have to be supplemented in order to maintain the family's lifestyle?).
What additional needs arise if both parents die?
Due to the complexity of federal and state laws, we highly recommend the use of specially trained professionals to assist you in preparing a life plan for your child(ren) with special needs.
The Advantages of a Special Needs Trust
The primary advantage that a special needs trust offers over a direct gift or inheritance is that, if arranged properly, the assets in the trust do not actually belong to the beneficiary. In this way, the trust can provide benefits to an individual but not cause the disabled individual to be disqualified from government programs. A special needs trust holds title to property for the benefit of a child or adult who has a disability. The special needs trust can be used to provide for the needs of a person with a disability and to supplement benefits received from various governmental assistance programs.
Special needs trusts typically provide for:
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eye glasses
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annual independent check-ups
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transportation (including vehicle purchase)
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equipment
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training programs
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maintenance
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education
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insurance (including payment of premiums)
Special needs trusts also may allow a trustee to give the beneficiary money for:
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various forms of entertainment (e.g., movies)
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electronic equipment
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trips and vacations
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computer equipment
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athletic training and competitions
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companion services/home health aide
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higher quality of medical or dental care that is otherwise provided by any local, state or federal agency or any private insurance policy (where it is clearly supplemental)
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other items to enhance self-esteem.
A trust can hold cash, stocks, personal property, and real property. It can own and/or be the beneficiary of life insurance. Special needs trusts also can be used to protect personal injury settlements or judgments from jeopardizing government benefit eligibility. Most importantly, special needs trusts can help parents coordinate their estate plans and provide peace of mind that their child will be provided for.
The Disadvantages of a Special Needs Trust
The main disadvantage to establishing a special needs trust is that the individual or family cannot have unrestrained use of the money to spend in any way they want. In order to preserve Medicaid and SSI eligibility, the special needs trust assets may not pay for food, clothing, shelter or other benefits provided through Medicaid or other public benefit programs. Certain exemptions are permitted, however, such as a handicap-accessible home and/or vehicle.
Dealing with government agencies to obtain benefits can be wearisome, but competent professionals can minimize this annoyance by assisting clients in applying for and maximizing benefits. Medicaid will have a lien against the assets remaining in a special needs trust at the death of the beneficiary to the extent that Medicaid payments have been made for the individual's benefit. The individual's ability to access Medicaid services at a 40% -60% discount more than offsets the lien, however.
Medicaid generally requires an up-front payment of their lien for services prior to the settlement of the case and establishment of the trust. This lien, however, may be negotiated in order to preserve funds for the disabled client's future. Again, this is an area where the services of a certified professional can be invaluable.
Though there are some disadvantages to a special needs trust, it is almost a certainty that the lifetime needs of the disabled individual will go beyond the limited amount of funds received through a legal settlement or inheritance. Thus, in an attempt to provide superior life services to individuals with disabilities, it is essential to access a variety of resources obtainable through various public benefit programs, such as Medicaid and SSI, and available private insurance as well as the special needs trust.
