Unique Challenges in Special Needs Planning
If you have a family member with special needs you face some unique challenges and issues of concern like:
Avoid planning by default
Everyone has an estate plan, whether they know it or not. If you haven’t developed your own, the government has one for you: In the absence of a will or living trust, state law determines how your wealth will be distributed when you die. Typically your assets are divided equally among your children or between your spouse and your children. Without a plan, your estate will spend more money than it needed to if you died with a plan in place at your death.
Special needs require a special needs trust
No one likes to think about his or her own mortality, so it’s no surprise that few people put estate planning at the top of their to-do lists. But to ensure that your wishes are carried out, you need to have an estate plan. And if your child, spouse or another family member is disabled, an estate plan featuring a special needs trust (also known as a supplemental needs trust) may be even more critical. If a family member is disabled or has a special need, failure to plan can have disastrous consequences. For one thing, an inheritance likely will disqualify that person from receiving government benefits that would otherwise help pay for his or her care.
If you have a child with special needs, you likely are looking for the best way to provide for him or her after you’re gone. If your child is unable to work and requires long-term care or other assistance, the financial burden can be enormous. A special needs trust can help you enhance your child’s quality of life without making your child ineligible for important government benefits.
There are four other documents that are important when planning in the special needs context:
Two Types of Special Needs Trusts
There are two types of special needs trusts:
Third-Party Trusts: this is the gold standard for planning in this area. The assets funding this trust come from a third party (parent or grand-parent) and are not the assets of the beneficiary of the trust.
Self-Settled Trusts: assets funding this trust are the assets of the beneficiary of the trust. This type of trust is often used in situations when the beneficiary receives money as the result of winning a lawsuit.
Another planning tool is the pooled trust. Pooled trusts can be either third party trusts or self-settled trusts. In this type of trust, assets of many trusts are combined for investment purposes.
In Texas, special needs trusts are established pursuant to either §142 of the Texas Property Code or §867 of the Texas Probate Code in conjunction with 42 U.S.C. §1396p(d)(4)(A).
A special needs trust provides resources to ensure that a family member with special needs receives the care he or she requires. It places responsibility for managing the assets with a qualified trustee, and it protects the assets from creditors and fraudsters. Perhaps most important, it allows you to assist a loved one without jeopardizing his or her eligibility for government benefits.
A disabled child may be eligible for a variety of valuable government benefits, including Medicaid and Supplemental Security Income (SSI).
Medicaid and SSI pay for basic medical care, food, clothing and shelter. But to be eligible for these benefits, your child’s resources must be limited to no more than $2,000 in “countable” assets, which generally includes everything except:
Too much income also can disqualify your child from government benefits. This puts parents in the difficult position of choosing between providing for their children without the government’s help or leaving them at the mercy of the health and welfare system.
One solution is to disinherit the child with special needs and leave excess assets to a sibling or other relative who will be responsible for the child’s support. This may be a dangerous strategy, though. For one thing, the sibling has no legal obligation to use the assets to care for the child with special needs. Plus, even with the best intentions, some or all of these resources could be lost if the sibling dies, divorces or runs into legal trouble.
Above the countable assets limit?
If the family member with special needs owns more than $2,000 in countable assets, thus making him or her ineligible for government assistance, a special needs trust is useless.
One solution is a Medicaid payback trust — an irrevocable trust established by the person with special needs (or by court order) to pay for permitted supplemental needs during his or her lifetime. When he or she dies, any remaining trust assets are used to reimburse the government for Medicaid benefits provided to the beneficiary, with any excess assets going to the trust’s remainding beneficiaries.
Supplement government benefits
A better solution is to implement a special needs trust — also called a supplemental needs trust — because it’s designed to supplement, rather than replace, government assistance. Assets placed in a properly designed special needs trust don’t belong to the beneficiary, so they won’t disqualify him or her from Medicaid or SSI benefits. You can fund the trust during life or at death using a variety of assets, including cash, stock, real estate or life insurance proceeds. The trust doesn’t have to be irrevocable, but a revocable trust may have negative tax consequences, including inclusion of the trust assets in your estate.
To preserve eligibility for government benefits, trust funds must not be used for the child’s support — in other words, they should not be used for for medical care, food, clothing or shelter covered by Medicaid or SSI. But they can be used for just about anything the government doesn’t pay for, including rehabilitation and medical care not covered by public benefits, education and training, transportation, insurance, wheelchair-accessible vans, and modifications to the child’s home.
A special needs trust also can be used to pay for quality-of-life expenses, such as travel, recreation, hobbies, entertainment, and stereo and television equipment.
Ensure the trust is drafted carefully
A special needs trust must be drafted carefully to avoid disrupting government benefits. It should give the trustee sole discretion over distributions and prohibit or strictly limit cash distributions to your child. It also must prohibit the trustee from distributing funds for support items covered by Medicaid or SSI.
In addition, the trust should expressly state that your intention is to use the funds for nonsupport purposes and to preserve the beneficiary’s eligibility for government benefits. If you wish, you can provide specific instructions on the types of nonsupport expenses the trust should pay, such as tuition or travel expenses for attending family gatherings.
Special care must also be taken in drafting Crummey withdrawal powers. To preserve the annual gift tax exclusion for contributions, most trusts give beneficiaries the right to withdraw funds contributed to the trust within 30 days (or some other time period) after the contribution.
But with a special needs trust, Crummey powers likely would disqualify the beneficiary from government assistance. One possible solution to this problem is to name another family member as remainder beneficiary and give that person the right to withdraw contributions. Tread carefully, though, as this is a particularly unique area of estate tax law that has innumerable traps for the unwary.
If a family member requires a nursing home, assisted-living facility or other long-term care after you’re gone, the cost can be enormous, so you’ll need to tap every resource at your disposal. A special needs trust allows you to leave as much as you can for your loved one while making the most of government assistance.
10 Costly Mistakes to Avoid When Planning for a Loved One with Special Needs
Make your intentions known
Be sure that your relatives and friends know about your plans. Otherwise, they could unwittingly sabotage your efforts by making gifts or bequests directly to the disabled person. If they would like to help, ask them to make their gifts to the special needs trust.
Click here to contact your local Hurst-Euless-Bedford special needs trust attorney.
Download our Supplemental Needs Trust Planning Questionnaire.
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