Special Needs Estate Planning
When it comes to making plans for your special needs child, there is no time like the present. There are several important considerations that require specific skills and knowledge of this area of the law. This article will discuss the need for a special trust and why it is the right thing to do for your beloved special needs child(ren).
Why do I want a special trust for my special needs child?
Gifts, inheritances, lawsuit settlements, or other funds that go to a special needs child belong to that child. They are his/her resources, and they will be counted in determining his eligibility for government programs such as Medicaid and Supplemental Security Income ("SSI"). Basically, you have three choices for providing for your special needs child after you are gone:
(1) Give him nothing and hope his siblings and other relatives (plus the government) will take good care of him;
(2) Give him a share of your estate (but not via a special trust) – with the understanding that (a) until his share has been spent down to nearly zero, he will lose his Medicaid and SSI benefits, and (b) thereafter the government (plus his siblings and other relatives) will need to take good care of him; or
(3) Give him nothing directly but instead set up a special trust that provides benefits on top of those provided by Medicaid and SSI.
The right kind of special trust does two things. (A) It holds, protects, and carefully spends the assets; and (B) it keeps the assets from counting as your child's assets or resources in determining his eligibility for governmental benefits. If drafted properly, and if operated properly, a special trust provides benefits that start where SSI and Medicaid stop – it provides extra or supplemental benefits. That way, your special needs child benefits from the trust (for as long as the assets last) at the same time as he benefits from the governmental programs.
How many types of special trusts are there?
Usually we talk about two kinds of trusts for special needs children. But many people use these labels interchangeably because these trusts have lots of common features. First, a "First Party Special Needs Trust" sometimes refers to a trust that holds your child's own assets. For example, if he got a settlement fund from a personal injury or medical malpractice lawsuit, or if he got a gift or inheritance directly, you would likely want to help him move those assets into a Special Needs Trust.
Second, if you or other relatives desire to help your child via gifts or inheritances, you would likely want to set up a "Supplemental Care Trust" (also known as a Third Party Special Needs Trust) to hold and administer those funds. You can set up a Supplemental Care Trust during your lifetime, or – for gifts that take place after you have been "promoted to glory" – you can include provisions for a Supplemental Care Trust in your last will or in your personal estate planning trust.
How does a special trust work?
Both types of special trusts provide extra benefits or supplemental benefits. They are not designed to provide benefits for basic support. Their purpose is to pay for comforts and luxuries that could not be ordinarily paid for by public funds. These trusts typically pay for things like education, recreation, counseling, and medical attention beyond the simple necessities of life. Supplemental needs can include medical and dental expenses, specialized equipment such as lifts or specially equipped vans, training and education, insurance, transportation, electronic equipment and appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses.
What are the differences between these two kinds of trusts?
The primary difference focuses on what happens after your special needs child passes away – assuming the trust still has some funds (a "remainder") at that time.
With a First Party Special Needs Trust (funded with the child's own assets), the state has first claim on the remainder. That is, this trust must first reimburse the state for all of the child's Medicaid costs. Then, any excess can be given to your other beneficiaries.
With a Supplemental Care Trust (funded with the assets of a third party, like you), the state has no claim on the remainder. In this case, all of the remainder can be given to your other beneficiaries.
What might go wrong?
While relatively simple in concept, the drafting and administration of Supplemental Care Trusts and Special Needs Trusts are subject to numerous requirements and complex regulations. If your Special Needs Trust or Supplemental Care Trust does not get the benefit of on-going professional advice, its assets could become "countable resources" that disqualify your special needs child from Medicaid, SSI, etc. The IRS has a host of income tax rules and forms that also require careful attention and compliance. Finally, you might pick the wrong person to be the trustee. Most of us are amateurs as to legal and financial matters. Honesty is not enough – your trustee needs to have good skills and long experience. He or she should be savvy enough to bring in experts sooner rather than later.
