For parents or supporting family members with a child with special needs, estate planning involves special needs planning to ensure continued care and support of the child after the parent passes away.
In many cases, a person with special needs already receives some sort of public assistance like Supplemental Security Income (SSI, administered through the Social Security Administration) or Medicaid, but would lose these benefits in the event they become the beneficiary of any cash, property, or assets left to them by a loved one.
That’s when a special needs trust can be invaluable.
What is a Special Needs Trust?
Let’s start with a brief definition of trusts in general.
Trusts are a common estate planning tool, set up by a grantor, (who funds the trust with cash and assets), a trustee (who administers funds as outlined by the grantor), and the beneficiary (or beneficiaries) of the trust.
The grantor leaves assets and property to the trust, rather than an individual, and trusts generally survive the death of the grantor, giving him or her peace of mind that loved ones will benefit from those assets, held in the trust, in the way they envision.
A special needs trust (also called a supplemental needs trust) does all of those important things but does it in a way as to ensure the beneficiary still qualifies for government benefits, since assets and property are left to the trust and not directly to the person with special needs.
Government Eligibility Requirements and Special Needs Trusts
Strict rules determine who qualifies for government assistance (like SSI and Medicaid) and who doesn’t. Typically, those who receive government aid may not possess more than $2,000 in cash and assets to qualify for benefits.
So a special needs trust is designed to supplement — but does not replace — these government benefits, by allowing the grantor to fund services, expenses, and equipment that aren’t “counted” by the government when assessing a person’s ability to qualify.
Examples of “non-countable” items may include things like:
- A home and/or furnishings
- Life insurance policies
- Funding for:
- Out-of-pocket medical or dental expenses
- Physical rehabilitation
- Burial expenses
- College tuition or vocational training
- Essential items needed for self-support, including personal care assistance
- Recreational activities, vacations, and hobbies
Assets left to an individual— or which are used to cover costs of allowed services, expenses, and equipment — do not affect the eligibility of an individual with special needs to qualify for government needs-based programs.
It’s important to note, there are certain rules around food and shelter-related costs, so it’s a good idea to consult a legal professional before arranging to pay for these types of items.
It is crucial to be clear and specific when outlining the terms of the trust since a trustee will have complete discretion over the property placed within the trust.
He or she is bound by law to carry out the wishes of the grantor but will have complete control over how money is spent on behalf of a loved one in order to carry out those wishes.
The trustee cannot, by law, give money directly to the individual with special needs without disqualifying them from SSI or Medicaid, but may spend trust assets to purchase goods and services on behalf of that individual.
The trustee has this level of discretionary power so that the individual with special needs has no control over these assets, and therefore the government does not count trust assets when assessing eligibility for programs like SSI or Medicaid.
Types of Special Needs Trusts
There are three types of special needs trusts: first party, third party and pooled trusts. Let’s take a look at each one in detail:
First Party Trusts
As with third party trusts, a first-party trust sets aside supplemental funds for costs not covered by government benefits.
However, one important distinction is that in the case of first-party trusts, the beneficiary’s assets must be used to fund the trust— e.g. money received from a personal injury settlement or retirement plan.
The beneficiary of a first-party trust must be under the age of 65 at the time the trust is established, and in the case of a minor must be established by a parent, grandparent or by the court.
A first-party trust must also be irrevocable, meaning it cannot be terminated once finalized, and can only be amended or otherwise changed in very limited circumstances (if at all). In specific cases, changes are allowed since these trusts last the lifetime of the beneficiary, and over a long period of time, life circumstances can change.
At the time of the primary beneficiary’s death, any balance of a special needs trust must be reimbursed to the government for benefits paid out during the individual’s lifetime. Any remaining assets may be passed on to secondary beneficiaries of the trust.
Third-Party Special Needs Trusts
These are very common types of special needs trusts and are funded by someone other than the individual with special needs (usually upon the grantor’s death).
Typically, they are created by family members and are endowed with property and assets owned by them, and may be revocable, unlike a first-party trust.
Perhaps the biggest distinction from a first-party trust is that it does not contain “payback provisions” so that the trustee isn’t required to reimburse the government for benefits paid out during the beneficiary’s lifetime upon the beneficiary’s demise.
These trusts are established by non-profit organizations that allow many special needs beneficiaries to “pool” their assets in one trust, but also allow them to maintain individual accounts within that trust. A beneficiary may work with a social worker or another advisor to customize a funds distribution plan that’s appropriate to the beneficiary’s life circumstances.
Because trust assets consist of contributions from many beneficiaries, the pooled resources can be used to make investments on their behalf which are more stable.
The non-profit organization also provides management services, and as with the other two types of trusts, assets placed within a pooled trust do not prevent an individual with special needs from accessing government benefits.
On the beneficiary’s death, as with a first-party trust, most states require any remaining funds be used to reimburse the government for any benefits paid out during the beneficiary’s lifetime. The law also allows the managing non-profit organization to take a percentage of any remaining assets to support its mission.
How Do You Plan for a Child With Special Needs?
To properly and adequately plan for a child with special needs, there are a number of steps you’ll need to take.
Create a Will and Appoint a Guardian
You’ll need to set up a will which, in very basic terms, describes property and names the beneficiary to whom the property will be transferred upon your death.
Since individuals under the age of 18 cannot legally own property (except for small items) the will must identify an adult responsible for managing property until the child reaches 18 (or any age you determine in the will).
You’ll need to appoint a guardian for your special needs child, which can be any competent adult, whether a relative, a family friend, or even a neighbor, and who will take care of and look after the best interests of your child.
Set Up a Special Needs Trust
It’s a good idea to meet with your attorney to determine which of the three types of trusts is the best fit for you and your special needs child.
You’ll also need an attorney’s advice when setting up the trust, to ensure all legal requirements are met.
Buy More Than Enough Life Insurance
Many people choose to purchase life insurance so that debts can be settled and loved ones are adequately provided for upon the insured’s death.
However, parents of special needs children must ensure their child is supported throughout their entire lifetime, not just while they are 18 or younger. So that means purchasing far more life insurance than for a child without special needs, as well as enough insurance to settle debts (and then some).
And it also means making sure these life insurance benefits don’t disqualify the child from receiving government benefits which is why special needs trusts are a popular solution.
Consult with a fee-only financial planner to get a better understanding of your life insurance needs. Agency commissions on life insurance can be substantial, which is why recommend seeking out a fee-only financial planner. You pay them a set fee for advisory services and never have to worry if he or she is trying to just sell you something that you may not need.
Create an ABLE Account
An ABLE (Achieving a Better Life Experience) account allows families with special needs children to save money in a tax-advantaged account to supplement any private insurance or government-provided benefits.
ABLE accounts are similar to 529 accounts used to fund higher education. In fact, an existing 529 account can be rolled over into an ABLE account for someone that is adjudicated as disabled before their 26th birthday.
Just as with special needs trusts, funds held in an ABLE account do not jeopardize a special needs child’s ability’ to qualify for government benefits.
Coordinate With Friends & Family
When planning for a special needs child, it’s important to coordinate with family and friends so that everyone is on the same page with respect to what the plan is, and how you want it carried out.
Additionally, you want to make sure that friends and family are aware of the rules governing how a special needs child may benefit from life insurance or other assets left to them without jeopardizing their ability to qualify for government program benefits.
Write Down Your Plan
You may know exactly how you want your special needs child cared for after your death, but it does no good if those responsible for their care don’t have clear instructions from you about how to execute that plan.
Document your plan, and put into writing the specific details of how you want your estate administered so your special needs child is properly cared for in your absence.
Planning With a Lawyer that Specializes in Special Needs Trusts
Special needs trusts should be a major consideration when planning your estate if you have a child with special needs.
Just as with any estate planning tool, you’ll need to make sure the trust is set up properly and in compliance with state and federal regulations. And that generally means consulting with an attorney who specializes in these types of trusts.
If you have a special needs child and want to ensure they are taken care of long after you’ve passed on, the attorneys at Port Legal law firm are experts in special needs trusts and can help you create an estate plan that will do just that.
Why not schedule a consultation today? It’s free, so you have nothing to lose, and your special needs child has everything to gain.