Question 37: What Is a Special Needs Trust?
It is common knowledge that government programs, in the form of Supplemental Security Income (SSI) and Medicaid, are very important for people with disabilities. These programs provide cash benefits as well as important medical coverage and long-term supports and services. The income level and financial resources of an individual with a disability, or family who is applying on behalf of their child with a disability, must not exceed a certain level in order qualify for these government benefits. Benefit recipients are allowed to retain only a total of $2,000 in assets, with some exceptions. A person with a disability receiving SSI, who accumulates more than $2,000 in cash resources, may lose SSI and, possibly, Medicaid.
However, government cash benefits provide only for the bare necessities: food, shelter, and clothing. They amount to less than a federal poverty level income. As we all know, there are more things and activities beyond these basics that add quality to life. For a parent planning for the future of their child with special needs, this poses a problem. When parents are able to care for their child, they provide the extras beyond the bare necessities to make their child¹s life comfortable. But who will provide those resources when they are not there to do so?
If parents leave any assets to their child who is receiving government benefits, they run the risk of disqualifying the child from receiving government benefits. If they leave assets to another family member or other person for the care of the child, they open other avenues of risk where the child might not get the benefit of those assets, such as divorce, bankruptcy, lawsuits, and financial mismanagement.
Fortunately, the government established rules allowing assets to be held in Trust for a recipient of SSI and Medicaid, as long as certain parameters are met.
How is a Special Needs Trust Used?
These Trusts, called Supplemental Needs or Special Needs Trusts (SNT), preserve government benefit eligibility and leave assets that will meet the supplemental needs of the person with a disability. The SNT must be designed specifically to supplement, not supplant, government benefits. Money from the Trust cannot be distributed directly to the person with a disability. Instead, it must be distributed to third parties to pay for goods and services to be used by the person with a disability.
The SNT can be used for various expenditures such as:
- Out-of-pocket medical and dental expenses
- Annual independent check-ups
- Transportation (including vehicle purchase)
- Maintenance of vehicles
- Insurance (including payment of premiums)
- Essential dietary needs
- Purchase materials for a hobby or recreation activity
- Purchase a computer or electronic equipment
- Pay for trips or vacations, pay for entertainment like going to a movie, a ballgame, concert, etc.
- Purchase of goods and services that add pleasure and quality to life: videos, furniture, or a television
- Athletic training or competitions
- Personal care attendant or escort
- Plus other qualified expenditures
When and How Should a SNT Be Set Up?
Parents may consider setting up a SNT when they begin their future planning activities such as drawing up their Wills or Revocable Living Trust. If their child with a disability will likely have long-term medical or support needs, the SNT can be a vehicle to supply the funding to provide lifetime quality care. Even if the child’s future prognosis is unclear, it is never too early to put plans in place for contingencies such as the parent’s sudden death or disability.
The laws governing Trusts are complex and are subject to changes in legislation that may vary by state and which could affect a person’s eligibility for the government benefits upon which they depend. New laws have considerably tightened the eligibility criteria for receiving government benefits and thus have affected many aspects of the way SNTs are drawn up. These regulations are complex and require a strong knowledge of the current legislation and how it impacts people planning for their child with special needs in order to preserve eligibility. Setting up a Special Needs Trust requires coordinated planning with an attorney knowledgeable in special needs planning who can draft a Will and necessary Trust documents.
When a parent or grandparent dies, additional assets can be distributed, under a Will or Trust, to the SNT. A percentage of shares in an estate can be left to a child’s SNT. Funding can come from discretionary contributions while parents are alive, Probate distributions, a Living Trust, life insurance, pension plan, or other sources. Therefore, the individual with a disability does not have to be left out of a Will, but should have their share of inheritance directed to his or her SNT. In the case of a life insurance policy, pension plan, or other source that would go to a beneficiary on death, the child’s SNT should be the beneficiary.
Managing the SNT
Having an SNT requires a Trustee to be appointed. In this case, the Trustee is the manager of the Trust and has general unlimited discretion to use Trust proceeds provided for the needs of the individual with a disability. The Trustee may be given full discretion to manage the money in the Trust and to decide how the money is used for the person’s benefit. The SNT should be drafted in such a way as to direct the Trustee in how to use the Trust’s resources for the individual¹s needs.
Trustees should have good money management/financial skills. The SNT will likely exist for a long period of time. Trustees should be chosen with longevity in mind, and the Trust itself should be drafted to adjust to changing circumstances, such as to allow Trustee to be changed or removed.
After the death of the individual with a disability, the Trustee oversees the final arrangements and the SNT usually ends. However, the Trustee may terminate the SNT if laws change or the SNT is challenged by the government.
While planning for the care of a special needs child certainly tops the list of emotionally-charged topics, your peace of mind gained from a well-designed estate plan, more than compensates for having to plan for the unthinkable. Be sure to consult with a qualified estate planning attorney when creating an SNT.