Special Needs Trust

Finacially Sound

by Marie Vidal, CFP, RIA, Senior Vice President of Raymond James & Associates

March 24, 2008

If you have a child with special needs, you may want to establish a special needs trust. A special needs trust (or supplemental needs trust) is an estate planning tool that can help you provide for the needs of a disabled individual without jeopardizing his or her eligibility for government benefits.

     The term "special needs" is used in this article to describe any trust that is established to fund the CMS.the supplemental needs of a disabled individual while maintaining that individual's eligibility for government benefits. The term includes not only trusts funded with a disabled individual's own funds, but also trusts funded with assets from a third party.

 Why establish a special needs trust?
     Unlike other types of trusts often used in estate planning, the primary goal of a special needs trust is to provide for the needs of a disabled individual throughout his or her life.
Federal and state benefits are generally available to qualifying children and adults. If your child qualifies for government benefits, one of your goals may be to ensure that his or her eligibility continues into the future. A special needs trust can help you attain this goal.

To preserve eligibility for Medicaid
     Medicaid provides medical assistance to those who are disabled, can demonstrate financial need, and whose monthly income and the value of their other assets fall below certain limits, which vary from state to state.
     In determining eligibility, a state may count only the income and assets that are legally available to the applicant. A special needs trust restricts the beneficiary's own direct access to the assets in the trust to such an extent that the assets are not considered legally available to the beneficiary. Thus, a special needs trust can protect Medicaid eligibility because assets in the trust are uncountable.
To preserve eligibility for Supplemental Security Income (SSI)
     Children and adults with special needs who have limited income and resources often receive monthly benefits from Supplemental Security Income (SSI), which can be used for basic needs such as housing and food. Because SSI benefits are need-based, inheriting money can mean that a child with special needs will lose his or her eligibility. By naming a special needs trust as your beneficiary instead of your child, however, assets can be devoted to the care of your loved one. In addition, since SSI recipients are normally automatically eligible for Medicaid benefits, preserving your child's eligibility for SSI may preserve his or her eligibility for Medicaid as well.

To provide additional care and services
     A special needs trust can be especially useful if you want to provide care and services necessary for your child's well-being without supplanting Medicaid benefits. Although Medicaid pays for a number of medical costs, it will not subsidize items and services considered nonessential such as eyeglasses, dental care, rehabilitation services, and home health aide services as well as personal expenses such as transportation, computer equipment, and vacations.
Caution: To ensure that trust assets are unavailable to the disabled beneficiary, the trustee must have sole discretion over the distribution of trust income and principal. The beneficiary must have no control over the trust and no right to demand distributions from the trust.

What requirements must a special needs trust meet?
     If the trust is intended to supplement, rather than replace, government benefits, it must be properly drafted.  Although requirements vary according to state law and the type of trust being established, here are some general rules:
• Generally, only a parent, grandparent, legal guardian, or court can set up a special needs trust. The disabled person, no matter how competent, cannot be the "creator" of the trust (even if the trust is funded by his or her personal assets).
• Funds may not be available to the disabled beneficiary.
• The beneficiary cannot revoke the trust.
• The individual with special needs must be considered "permanently and totally disabled" under SSI criteria. Different rules apply to adults and children.
• Under the terms of the trust, the trustee may not be permitted to make payments or distributions that might interfere with government benefit eligibility (e.g., distributions cannot be made directly to the beneficiary).
• Special needs trusts may be established as part of a will or during the creator's lifetime.
• Special needs trusts can hold an unlimited amount of funds and can be added to at any time.

What types of special needs trusts are available?
      Special needs trusts generally fall into two general categories: the third-party special needs trust (funded with assets belonging to someone other than the beneficiary) and the self-settled trust (funded with assets belonging to the beneficiary).

Third-party special needs trust
     The third-party special needs trust is established with funds that belong to someone other than the disabled beneficiary. For instance, a parent or grandparent may create such a trust under a will and fund it with a gift of cash, life insurance, or another asset. Upon the death of the disabled individual, any remaining assets can be distributed to whoever  has been designated; if properly drafted, the state will not have to be "paid back" for long-term care services when the disabled individual dies.

Self-settled trust
     A self-settled special needs trust is established with funds owned by the disabled person, such as a personal injury award or inheritance.  One type of self-settled trust is the qualified self-funded special needs trust, which is created for the sole benefit of a disabled individual who is under age 65 at the time the trust is established. Upon the beneficiary's death, Medicaid must be "paid back" from the trust assets for any long-term care provided.
    Another common type is the qualified pooled trust, which is established and managed by a nonprofit organization. Separate accounts are maintained for each trust beneficiary, but funds are pooled for investment and management purposes. Upon the beneficiary's death, the nonprofit organization receives assets remaining in the trust, and will reimburse Medicaid for benefits paid to the beneficiary.

How is a special needs trust typically funded?
     In many cases, a special needs trust is established, but not funded, while the parent or other creator is alive.  Upon the parent's death, his or her will transfers the disabled child's portion of an inheritance to the trust. The trust (instead of the disabled child) can also be designated as the beneficiary of various assets, such as employee benefits and life insurance policies.  Typically, it would include: life insurance, cash, investments, retirement plan benefits, personal and real property and proceeds from a personal injury settlement.
     Although life insurance is one of the most popular funding methods (in particular, lower-cost survivorship life insurance), each method has advantages and disadvantages. To ensure that the trust is adequately funded, you'll need to estimate how much income your child is likely to need over the course of his or her lifetime.

What else should you consider?
If you're thinking about setting up a special needs trust, there are a few other points to consider.

Selecting a trustee
     A trustee is a person or institution selected to administer a trust and manage its assets. The trustee's role is to adhere to the terms of the trust document and fulfill its objectives. You may wish to name yourself or another family member as trustee, or you may wish to name an attorney, bank, or other professional trustee. Another option is to name a family member and a professional trustee as co-trustees.

Providing a letter of intent
      A letter of intent indicating how the child should be cared for after the parents are gone is often written. Although it's not a legal document, it can provide important information to those involved in the care of your child, including such issues as your child's medical needs, daily routine, interests, likes and dislikes, religious practices, living arrangements, social activities, behavior management, and degree of self-sufficiency.

 Informing family members
     Explain to siblings or other family members why you're setting up the special needs trust. Explanations and clear directions now may help avoid family conflicts later.

Working with a qualified attorney or financial professional
     Planning for the care of special needs individuals is complex and technical, and the laws that govern special needs trusts differ from state to state. Work with a qualified attorney or financial professional who has experience with the planning needs of families of disabled individuals as well as a thorough understanding of the income, gift, and estate tax consequences that must be considered when funding and administering a special needs trust.