Special Needs Trusts
Parents or grandparents of a disabled child should leave assets to them in a special needs trust, to avoid the child being disqualified from receiving government benefits, such as SSI and Medicaid. The reasoning behind these special needs trusts is simple — prior to the protection now afforded by these trusts, parents would simply disinherit their disabled children rather than see them lose their benefits. Since the state wasn’t getting the inheritance monies anyway, why not allow it to go to the disabled child for his or her extra needs, above and beyond what the state supplies, such as:
- Dietary needs
- Hobbies, sports, exercise
- Tickets for events
- Health care costs and medical procedures
- Vocational rehabilitation
- Household goods (appliances, furniture, computer, television)
- Personal care products
- Personal services (lawn mowing, housecleaning, babysitting, etc.)
- Real property
- Automobile (including gas and insurance)
- Transportation (buses, cabs, trains, domestic airfare)
These trusts, however, offer traps for the unwary. Since payments to the child will generally reduce their SSI payments dollar for dollar, trustees of such trusts should be advised to make payments directly to the providers of goods and services. Preserving SSI benefits is crucial since eligibility for SSI determines eligibility for Medicaid.
In other words, if SSI is lost the recipient also loses their Medicaid benefits. In addition, any benefits previously paid by Medicaid may be recovered. As such, one also has to be mindful of bequests from well-meaning grandparents.
Distributions from the trust to the beneficiary should be “in kind” rather than in cash. For example, the trust may own items such as furniture and allow the beneficiary child the use of them. In addition, the special needs trust must be carefully drafted so that it only allows payments for any benefits over and above what the government provides, not only now but also in the future. The child may not control or have direct access to any portion of the trust.
There are two types of special needs trusts. First party and third party. The first party trust is set up by a parent, grandparent or legal guardian using the child’s own money, either through earnings, an inheritance that was left directly to them or, perhaps, a personal injury award. These trusts require a “payback” provision, meaning that on the death of the child beneficiary, the trust must pay back the state for an government benefits received. In other words, the state is saying that, we will let you use this money for your special needs, but whatever was not needed should go back towards your basic care. These trusts require annual reporting and accounting requirements to the state.
A third party trust is set up by a third party, usually a parent or grandparent, using their own money. Here, no “payback” provision is required because it was not the child’s own money that funded the trust and the parent or grandparent had no obligation to leave any assets to the child. Indeed, requiring a payback provision would discourage many parents from setting up a special needs trust at all. Generally, on the death of the child beneficiary, the balance of the trust is paid out to the disabled child’s children first, if any, otherwise to the surviving siblings, then nieces and nephews, etc.
A major issue for parents today is the increased life expectancy of their disabled child. With major advances in medical care, many disabled children, who would have in earlier days predeceased their parents, are now surviving them. In order to solve this problem, parents often leave a disproportionate share of the estate to the disabled child. This can engender hard feelings in siblings who, although agreeable to such an arrangement initially, may find themselves in need of funds later on and resentful of the uneven distribution in favor of the disabled child. The surviving siblings are often the only support network available for the special needs child so it is all the more important to keep peace and harmony in the family.
Often, an analysis with the elder law estate planning attorney will reveal that the income from an equal division of the estate will, in fact, be sufficient to provide for the disabled child’s needs. If such is not the case, “second-to-die” insurance may be purchased to provide for any additional funds needed. These policies are written over both parent’s lives. Since the insurance company only has to pay when the second parent dies, the premiums are significantly lower than on a single life policy. Consideration should also be given to having the policy owned by an Irrevocable Life Insurance Trust, for tax purposes.