Imagine that you are the parent or grandparent of a child diagnosed with cerebral palsy, Down’s syndrome, the victim of an automobile accident, or any of the countless other methods of being disabled. When preparing an estate plan, most parents or grandparents want nothing more than to provide for their disabled family member, but are wisely concerned that leaving an inheritance to the child would cause them to lose their Medicaid, SSI, or other government benefits that have an asset limitation (which can be as low as $1,000). Many times, the answer to this problem is the use of a special needs trust.
A special needs trust is a unique trust arrangement whereby the trustee (which can be an individual, but often a corporate trustee is preferable, as discussed later) holds the assets and has complete discretion on the timing and amount of any distributions to be made for the benefit of the disabled individual. The assets in a special needs trust often consist of inherited money, but lifetime gifts can also be made to the trust, including from other individuals (but not the disabled individual). Additionally, a special needs trust can be structured to stand alone during the person who creates the trust’s lifetime, or be created upon their death through their regular estate planning (i.e. will or revocable living trust). Properly drafted trusts will be very clear that the intent of the trust is to “supplement and not supplant” government benefits. Perfect examples of when a supplement to what the state and federal government provides for the disabled individual might include: nicer living accommodations, entertainment such as being able to go on vacation with family members, activities such as Therapeutic Horsemanship, or certain medical costs for times when the preferred treatment provider doesn’t participate in Medicaid. If not for the funds placed into the special needs trust, the individual might either have to go without these non-essential, but important needs, or family members would have to be relied upon to pay out of their own funds, for which they have no obligation, and many times do not have the financial means to provide these extra benefits. If the disabled individual has acquired funds of their own, there are also a few unique types of “self-settled” special needs trust that can handle these assets and still keep benefits intact. The rules for self-settled trusts are different than a third party special needs trust, and it is important to make sure that the counsel helping create either type of trust is familiar with the unique requirements of each type.
Often, a question is raised about just giving the disabled child’s share to his/her siblings who can then theoretically set aside these funds. There are several problems with this approach. First, as stated above, there is no obligation for the sibling to provide any benefits. More often than not, the siblings would gladly go along with this plan. However, because the sibling has full control over these assets, they are subject to being included in any divorce proceeding or other creditor claims of the sibling. Finally, often the spouse or friends of the sibling will try to influence the sibling to spend the assets on themselves (i.e. bigger home, new cars, private school for their children, etc.), which then leads to the funds being exhausted without satisfying the intent of the parents. At the very least, this can lead to unnecessary stress being put on the sibling. This approach has many negatives, with almost no advantages. The special needs trust offers a perfect solution where the sibling has no choice but to make the right decision and spend the assets only for the benefit of the disabled child.
The choice of a trustee to manage substantial assets is always a complex decision, and even more so when planning for a disabled child. On one hand, siblings are often the best source of true concern for the disabled individual, but they often lack financial expertise. This problem is compounded when the trustee has to be aware of all the different requirements for the individual benefit plans. Mistakes in how distributions are made and the amount distributed can cause long periods of disqualification from these benefits. For these reasons, it is usually preferable to have a corporate trustee that has experience in managing special needs trust as the trustee. Sometimes a middle ground can be reached by having
a family member serve as a trust advisor to the corporate trustee.
Having a disabled individual in the family can be very rewarding, but also requires significantly more foresight when planning for that disabled individual after the primary caretakers are deceased. A special needs trust, drafted by an attorney who is familiar with unique requirements of these trusts, is the preferred solution to the problem of leaving assets to disabled individuals. In addition to protecting the eligibility for government benefits, a knowledgeable trustee can help ensure that the assets are managed so as to last for the lifetime of the disabled individual or even longer. Upon the death of the individual, any remaining funds could be dispersed to other family members, but also could go to the various
non-profit agencies that help provide some of the excellent resources for disabled individuals in our community. What a wonderful way to provide for a disabled individual, and support the disabled community at the same time!
In summary, there are several variations on special needs trusts, to fit the varying circumstances that each family faces. What is consistent between all special needs trust is that their intent is protect the continued eligibility of a disabled individual to receive government benefits. For any family member or friend of a disabled individual who would like to ensure that funds are used for that disabled individual, the special needs trust should be a part of their estate planning. The failure to use a special needs trust to protect the disabled individual can have disastrous results, and often cause funds to be needlessly exhausted to restore eligibility. Talk with your estate planning counsel about the intricacies of these trusts and if they are appropriate for your situation. If they are not familiar with these trusts, ask them to refer you to someone who is familiar with them.
Mike Weeks is a Certified Elder Law Attorney (as accredited by the National Elder Law Foundation), and the founder of the Weeks Group, LLC, a law firm that practices in traditional estate planning, disability planning, and elder law. The firm is located in St. Charles, MO.