The challenges of a special needs trust
What is a special needs trust?
Over the years, I have worked with a number of clients who have had a child or other relative with special needs. These situations have ranged from children born with developmental disabilities to adult children or siblings who have suffered cognitive impairment or severe physical disabilities resulting from an accident. These situations present a litany of issues and challenges for the parent, grandparent or guardian of these individuals.
While financial concerns are only one aspect of these situations, they are often critical. The services, supplies, equipment, and medical care that are required can really put a strain on your budget. You may also need to consider specialized child care and specialized education. Often, one of the most worrisome concerns is what happens to the individual when the parent or guardian is gone and can no longer provide financial resources.
The good news is that federal and state benefits are generally available to qualifying children and adults who have special needs. The bad news is that the rules regarding these programs are fairly strict. 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. In addition, this type of trust can provide for supplementary care for your loved one. Essentially a special needs trust is an estate planning tool that can help you provide for the needs of an individual who is disabled without jeopardizing his or her eligibility for government benefits.
The primary forms of government aid are Medicaid (Medi-Cal in California) which provides medical assistance to those who are disabled and can demonstrate financial need and Supplemental Security Income (SSI) which is a monthly income benefit for children and adults with limited income and resources. The cash payments from SSI can be used for basic needs such as housing and food.
In determining Medicaid/Medi-Cal eligibility, only the income and assets legally available to the applicant are considered. 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/Medi-Cal eligibility because assets in the trust are uncountable.
Similarly, SSI benefits are need based. Therefore, income and assets legally available to the recipient jeopardize their eligibility for the program. This means that if a child with special needs inherits money, they can lose their eligibility for this benefit program. 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/Medi-Cal benefits, preserving your child’s eligibility for SSI may preserve his or her eligibility for Medicaid/Medi-Cal as well.
A special needs trust can be especially useful if you want to provide care and services necessary for your child’s wellbeing without losing their Medicaid benefits. Although Medicaid will pay for a variety of medical costs, including hospital bills, doctor’s services, and long-term care, it will not pay for items considered non-essential. These may include health-related expenses such as eyeglasses, dental care, rehabilitation services, as well as other personal expenses such as transportation, computer equipment, and vacations.
There are a number of requirements a special needs trust must meet if it is intended to supplement rather than replace government benefits. These requirements will vary from state to state and according to the type of special needs trust being created. There are a few things that are generally true of most special needs trusts though.
A special needs trust must be created by a parent, grandparent, legal guardian, or court. The person with disabilities cannot be the creator of their own trust. Nor can the beneficiary revoke the trust. As I mentioned before, funds in the trust must not be available to the beneficiary. This means that the trustee of the special needs trust may direct use of the funds for the care and welfare of the beneficiary, but funds can never be paid directly to the beneficiary themselves. This brings up the critical issue of trustee selection. The trustee is charged with the administration of the trust and the management of trust assets. Their role is to adhere to the terms of the trust document and to fulfill its’ objectives. Typically you name yourself as the trustee, but you can also choose a family member, or an attorney, bank, or other professional trustee. Should you name an individual, make sure that you also name a successor trustee, just in case the trustee becomes unable to perform their duties.
A special needs trust has no limit on the amount of funds it can hold and one of the most popular funding methods is life insurance. However, special needs trusts can also be funded with cash, stocks, bonds, mutual funds, retirement accounts, personal and real property and for certain type of special needs trust even the proceeds from a personal injury settlement.
It’s important to note that special needs planning is complex and technical. To properly plan for your loved one’s future, it is important to work with a qualified attorney and/or a financial professional that has experience with the planning needs of families and individuals with disabilities. It is important that this person have a thorough understanding of the income, gift, and estate tax consequences that must be considered when funding and administering a special needs trust.