The Who, What, and Why of Estate Planning With a Special Needs Trust

THE COUNSELOR

Volume 4 • Issue 4 • May 2014

The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month's issue will discuss Special Needs Trusts.  If you are interested in learning more about the ideas and processes discussed in this newsletter please contact us for an initial consultation.


What is a Special Needs Trust?

A Special Needs Trust also known as a Supplemental Needs Trust (SNT) is a type of trust that is designed to hold assets for a disabled individual receiving public benefits.  Those assets in turn can be used to benefit the disabled individual. Assets owned inside an SNT are not counted against someone when determining their public benefit eligibility.

What this means is that someone planning for a disabled individual has a way to provide for that individual’s special needs while still preserving access to essential programs.   Along with preserving eligibility for government programs, assets held in a SNT can be protected in a way that assets held outside of a SNT cannot.  Say, for example, your adult disabled child has assets to help pay for their care.  These assets include money you have provided, as well as money that grandparents have also given to the disabled child.   If your child is sued, or makes a financial decision that subjects them to some other type of creditor claim, that money that has been given to them is at risk of being seized.  However, if that money was instead placed in a SNT, it would be safe from a creditor’s claim or a potential judgment, and would be available for its intended purpose – to care for your disabled child.

Is a Special Needs Trust the only way to plan for a disabled individual?

There are many ways to plan for a disabled individual, but this unique tool offers some benefits and some protections that other tools do not.  It is common for parents who have a special needs child to consider who could step into their role as caregiver.  Often, if they have other adult children, they identify a responsible and caring sibling to do the job and they give resources to this sibling to care for their disabled child when they are no longer able to do so.  On its face, this seems like a good solution.  But there are unnecessary risks with this type of arrangement.  The money that is given to the responsible sibling is not protected in any way – which means it is subject to the claims of a creditor, that it is subject to judgment, or that if there is a divorce that money or part of it could be taken as part of a divorce settlement. It is surely true that none of these things could happen, but by putting assets in a SNT you are planning for the protection and care of people who need it most and who cannot plan for themselves.

How does a Special Needs Trust work?

Based on the source of the funds for the trust, there are different requirements to be followed in properly setting up and administering the trust.  If the money to fund the trust belongs to the beneficiary, such as money from a personal injury settlement, the type of trust set up would be a first party SNT.  This type of trust requires that any funds remaining in the trust after the death of the beneficiary would need to be used to reimburse Medicaid before they could be distributed to other parties.

A different type of SNT, often referred to as a third party SNT, can be created with assets provided by parents, other relatives or friends of the beneficiary. Such a trust can be created and funded during the life of the parents or as part of their last will and testament. Upon the beneficiary’s death, there is no requirement to use residual funds to reimburse Medicaid for services provided to the individual, and “remainder” beneficiaries may be named to receive those assets.

A key benefit of this type of SNT is that family and friends can make gifts to the Trust.  These family members and friends can name the Special Needs Trust as the beneficiary of their own assets in their Trust or Will, and they can also name the Special Needs Trust as a beneficiary of life insurance or retirement benefits.

While the SNT is designed to receive and manage assets for a person with a disability, the Trustee will have full control and discretion over distributions. The distributions from the Trust are to “supplement” government benefits and provide for “special needs” that enhance quality of life. “Special needs” can include medical and dental expenses, annual check-ups, desirable equipment (such as, a specially equipped van), training and education, insurance, transportation, and essential dietary needs. It may also include spending money, electronic equipment, computers, vacations, movies, payments for a companion, and other quality of-life enhancing expenses.

Conclusion

It is always important to plan, but if you are caring for a disabled person, the necessity of proper planning takes on even a greater significance.  A disabled individual may always be in a situation to need some type of physical, emotional and financial support.  Through using the correct tools, someone planning for a disabled individual can ensure that there are no unintended consequences of their financial decisions, and the results is that the disabled individual is cared for in the very best way possible.


This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.