Special Needs Trusts
A special needs trust is one important element in special needs planning if you have a loved one with disabilities. It is a specialized legal document designed to benefit an individual who has a disability. If you have a loved one who has a developmental disability or some other disability, then you can use a special needs trust to ensure that the inheritance you desire to leave him or her will used for his or her benefit. These trusts are frequently called “supplemental needs trusts” as well.
There are two primary purposes for a special needs trust. The first purpose is to keep assets for the benefit of your disabled loved one from counting as his or her own assets which could disqualify them for programs of government assistance, such as SSI, Medicaid, as well as subsidized housing and vocational rehabilitation benefits. The second purpose -- and the one that brings peace of mind to the family – is that the person with disabilities will be able to have extra care (supplemental care) over and above what the government provides. Not only will your disabled loved one live an enhanced quality of life, but he will never have to be alone because the special needs trust can pay for caregivers for a life-time.
Special needs trusts may be written into your Will or your revocable living trust. More often, however, a special needs trust is a “stand alone” legal document. These stand alone trusts allow grandparents or siblings to contribute directly to the trust or specifically name the trust in their own estate plans to provide more funds for the person with disabilities. And, the stand alone trusts come with greater flexibility, allowing the funding through a will or gifts from relatives and friends made directly to the trust, or through "survivorship" or "second-to-die" life insurance policies that cover both parents and pay out on the death of the second parent.
As mentioned before, special needs trust can hold an unlimited amount of assets. And, in a properly-drafted trust, those assets are not considered countable assets for purposes of qualification for certain governmental benefits. Such benefits may include Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, subsidized housing, and other benefits based upon need, where the disabled person is limited to personal assets less than $2000 in value and monthly income in even smaller amounts.
According to federal law, distributions from a special needs trust can be used for supplemental and extra care over and above what the government provides. Consequently, if the government is providing for all of the disabled person’s needs, then the trust’s distributions will be limited in nature. If, however, there are no government benefits available, the trust will provide for everything the disabled person needs. Although there are Medicaid rules that say that the trust assets cannot be used for food or shelter, these rules have to be interpreted carefully. There are legal ways to pay for food or shelter from the trust for the disabled person without substantially disrupting his or her government assistance. This is one of those critical areas where working with a qualified attorney is absolutely necessary.
Some parents ask: “Why can’t I just disinherit my disabled child and leave all my assets to my typical child who will then hold and take care of my disabled child’s inheritance without the necessity of special needs trust?” While it might seem like a good idea simply to leave a set amount of money to your disabled child's sibling or other close relative, with the understanding that the money will be spent on the disabled child, this often backfires. It does nothing other than put the disabled person’s assets at risk. The sibling of the disabled child could be subject to liabilities, such as divorce, or a bankruptcy, or a creditor’s judgment. Or, the sibling may die and leave the assets to his surviving spouse. Do we really believe the surviving spouse will look out for your disabled child? A special needs trust easily avoids these terrible potential consequences. And, it avoids putting an emotional strain on family relations.
Finally, it is important to clarify that the type of special needs trust discussed above have been funded with assets belonging to someone other than the disabled person. Consequently, we have been discussing a third party trust. Federal law does not require any repayment from the trust’s assets at the time of death of the disabled person for the benefits received during his or her lifetime. This means you have the flexibility to dictate within the special needs trust where the remaining trust assets go at the time of the disabled person’s death.
What Else?
The special needs trust ensures that the Trustee has instructions on how to make allowable distributions for the benefit of the person with disabilities. But, beyond the sterile legal provisions of the trust document, one way to be clear about what you intend for your disabled loved one's future is to make a "Letter Of Intent" to be given to the trustee at the time of your death. This document gives family members and others the benefit of your knowledge about your child's capabilities, needs and fears, and can be updated periodically. A letter of intent can include: Biographical info; Financial details; Medical history and needs; Social contacts; Any negative influences you'd like to guard against; Personality traits; Skills, hobbies and physical abilities; Goals your loved one is working toward. The wealth of information contained in a Letter of Intent will certainly make your disabled family member’s more meaningful.