Imagine that you are the parent or grandparent of a child with cerebral palsy, autism, Down's syndrome, the victim of an automobile accident, or subject to any other disabling condition. 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 a disabled individual would cause a loss or reduction in Medicaid, SSI, or other governmental benefits that may impose a limitation on the amount of assets or income an individual can have. One possible solution is the use of a properly drafted special needs trust to hold inherited assets for the benefit of the disabled beneficiary.
A special needs trust is a unique trust arrangement whereby the trustee holds the assets and has complete discretion on the timing and amount of any distributions to be made to or for the benefit of the disabled individual. The assets in a special needs trust often consist of inherited money, but in certain circumstances, lifetime gifts can also be made to the trust from the individual establishing the trust or from outside parties provided certain rules are followed. Additionally, a special needs trust can be created that exists immediately (during the donor's lifetime), or it can be created upon death through their regular estate planning documents such as a will or revocable living trust. Properly drafted trusts will be very clear that the intent of the trust is to "supplement and not supplant" governmental benefits.
A few common examples of distributions that would supplement state and/or federal governmental benefit programs include: nicer living accommodations, entertainment, cultural or social activities, travel or vacations, participation in non-covered therapeutic programs such as equine or aquatic programs, or certain medical costs when the preferred treatment provider doesn't participate in Medicaid or other applicable governmental programs. If not for the funds placed into the special needs trust, the individual would either have to forgo these non-essential, but important needs, or family members would have to pay for these items out of their own funds, for which they have no obligation, and many times do not have the financial means, to provide.
If the disabled individual has acquired funds of their own, there are certain types of "self-settled" special needs trusts that can hold a disabled individual's assets while permitting the individual to maintain his or her qualification for public benefits. In certain circumstances, a court must approve the creation of a self-settled special needs trust or must approve the transfer of the disabled individual's assets into the trust in order to preserve benefit qualification. The rules governing self-settled trusts are very different than the third party special needs trusts discussed above; therefore, it is important to make sure that the attorney drafting either type of trust is familiar with the unique requirements of each.
Often times an individual will simply state an intention to leave the disabled family member out of their estate plan altogether and assume that other individuals inheriting assets will take care of the disabled individual. This type of planning is often referred to as a "moral trust" and seldom works as intended. For a variety of reasons, including estate and gift tax consequences, it may not be possible for other beneficiaries to share their inheritance with a disabled individual. Aside from potential adverse tax consequences, there are several other problems that often occur with the use of moral trusts. First and foremost, there is no legal obligation for a parent, sibling, or other beneficiary to share their inheritance with the disabled individual. More often than not parents, siblings, and other beneficiaries would gladly go along with the donor's plan and have good intentions to provide for a disinherited disabled individual; however, once inherited, those assets are subject to any creditors of the individual inheriting the assets. Creditor issues can arise unexpectedly due to a beneficiary's profession or business liabilities, accidents or lawsuits in which they find themselves involved, or divorces. In addition, the spouse or friends of the beneficiaries inheriting the assets may try to influence the individual 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 donor. The use of moral trusts has many negative consequences, with almost no advantages, so this planning technique is rarely a good choice. The use of a special needs trust offers a perfect solution where the trustee (who may be a parent or sibling of the disabled individual) has no choice but to make the right decision and spend the assets only for the benefit of the disabled beneficiary.
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.
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