Special Needs Trusts
When you die, you may choose to leave money or other assets to a child, grandchild or other family member with a physical or mental disability. In doing so, you doubtlessly hope to enhance their quality of life. Unfortunately, if you are not careful, your hard-earned money may go to the government instead. Even worse, receiving the money could cost your beneficiary access to vital government services. A Special Needs Trust is a mechanism which guarantees that your gift fully benefits your loved one as intended.
What is a Special Needs Trust and How Does it Work?
A special needs trust is a trust tailored to the unique needs of a beneficiary with physical or mental disabilities. The trust is created with the specific needs, lifestyle, and future of the beneficiary in mind. Commonly, these special needs trusts are used to ensure that the beneficiaries do not lose government benefits they are receiving or to which they may be entitled in the future.
The Trust legally owns the property and money that is assigned to it. Guidelines are written into the Trust document directing the manner in which the assets are to be used. There is a person called the Trustee who manages the Trust to the best advantage of the beneficiary, according to said guidelines. The assets in the Trust do not belong to the Trustee, nor do they belong directly to the beneficiary because the beneficiary cannot take money out of the Trust directly. Therefore, the Trust assets are not counted when calculating eligibility for government programs. Once established, the Trust will usually continue until the beneficiary's death, or until the assets are exhausted.
The trustee of a special needs trust can be a family member or, if an appropriate and trustworthy family member is unavailable, a third party could be appointed by the court. Choosing the right trustee must be done very carefully, especially for special needs trusts created to benefit a younger person or a person who lacks the mental capacity to oversee financial affairs.
What Benefits Can a Special Needs Trust Provide?
With a properly designed Special Needs Trust, the trust assets are used to provide goods and services which supplement, rather than supplant, those provided by the government. Accordingly, the Trust may not provide basic food, shelter and clothing. It does, however, allow for a vast quality of life improvement for your loved one. A few examples of benefits it may provide include:
- A computer with adaptive software and hardware;
- An automated or specially designed wheelchair tailored to the special needs of the recipient (as opposed to a more basic model available through the government)
- Other assistive technologies;
- Education and additional vocational rehabilitation;
- Home modifications, such as widening a doorway to accommodate a wheelchair;
- A personal aide to facilitate participation in a family vacation; and,
- Numerous nutritional supplements and vitamins not otherwise covered.
Why Worry About Government Benefits?
People with special needs may qualify for government services to help cover the costs of their care. There are strict income and asset limits for anyone receiving such benefits. Two of the most common programs are:
- Supplemental Security Income (SSI): SSI provides income for food, shelter, and clothing for individuals who are disabled according to the Social Security Adminstration definition.
- To qualify, one must have less than $2,000.00 in assets (usually not including the value of the home and one vehicle). Additionally, the amount of the SSI benefit is reduced by the amount of earned or unearned income, such as a stipend from the trust.
- Medical Assistance (MA): Individuals often receive MA in conjunction with SSI benefits. MA provides for medical care, food stamps and heating and rental assistance. It is also based on financial need with strict income and asset caps.
If a recipient of these benefits receives money or other gifts, it could reduce the amount of government benefits given, make the person completely ineligible, or even be used to pay the government back for past services. In essence, all of the money left to your loved one in your Will may be funneled directly into paying for the goods and services the government was already providing, and your beneficiary would gain no additional comfort or quality of life improvements.
What are Some Other Benefits of a Special Needs Trust?
Money in a trust fund is well protected. It is not subject to creditors or seizure, which means that even if the beneficiary were to accrue debt, the assets in the Special Needs Trust would not be at jeopardy. Furthermore, if ever sued in a personal injury or other type of case (such as Bankruptcy), the beneficiary would not be considered a “deep pocket” because the Trust assets would be protected from judgement.
Assets in a special needs trust may pass to an alternative beneficiary upon the death of the initial recipient. If not protected by this type of trust, when the initial beneficiary died, the monies could be required to pay back the government for any expenses incurred previously.
What Are the Different Types of Special Needs Trusts?
- Common Law Trusts: Common law special needs trusts are the main focus of this article as they are relevant to Estate Planning. They are set up by family members to benefit loved ones with special needs. If established through a Will, they are called “testamentary special needs trusts”. If created during the grantor's lifetime, they are “inter vivos special needs trusts”.
- Payback Trusts: Sometimes, when an individual with special needs inherits funds through a Will or is awarded money in a lawsuit, a trust is created. However, the government must be reimbursed for services it provided during the beneficiaries life out of the trust monies once the beneficiary dies.
- Pooled Trusts: Sometimes a third party nonprofit organization administers the pooled funds of individuals with special needs; a group home may do this for its residents. While there are many potential benefits to this, generally once an individual's money has entered the pool, it cannot simply be withdrawn. Furthermore, pooled trust funds are no longer exempt from Medicaid repayment rules.
What Common Mistakes are Made When Planning for a Special Needs Beneficiary?
- Naming the beneficiary as the direct recipient of assets from a will, trust, insurance policy, annuity, or retirement plan: Doing this most often renders the beneficiary ineligible for SSI and Medical Assistance benefits;
- Disinheriting the potential beneficiary: While this may preserve the ability to receive government benefits, it leaves the person with special needs more dependent on the government against a backdrop of the uncertain future of government programs;
- Leaving funds to another family member with the “understanding” that they will be used to care for the person with special needs: Potential complications include the chosen family member dying, becoming disabled, losing the money to creditors or in a divorce, or simply growing estranged from your intended beneficiary in fact; and,
- Creating a “support trust”: Since this type of trust makes funds available for exactly the types of services the government may provide, it may force the beneficiary to spend down the trust's funds before making public benefits available.
Who Should Prepare the Special Needs Trust?
The most reliable method of safeguarding the future of a loved one with special needs is to have an experienced attorney such as Gary Stewart Seflin draft a Special Needs Trust. The laws surrounding such trusts and relevant government benefits are complex and subject to change. You need an attorney who both keeps current with the shifting legal environment and is skilled with the often nuanced language required. A single word could be the difference between creating a trust that will be rapidly exhausted, needlessly replacing government benefits, and one which will enhance the life of your beneficiary as you intend.
Estate Planning is too important for yourself and your loved ones to let anyone other than an experienced Estate Attorney handle your affairs. To arrange a free consultation with Gary Stewart Seflin, Esquire, call 610-892-9700 or fill out our Contact Form here.