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Financial Planning > Trusts and Estates > Trust Planning

The Special Needs Trust: Overlooked And Underutilized

By Daniel J. Munroe

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Last year, much of the country joined the debate concerning Terri Schiavo and became better educated on planning issues involving special needs individuals. While the emotions generated by that controversy have waned, Americans continue to consider the legal issues involved in planning for special needs individuals. Accordingly, producers may consider an often discussed, but little understood, planning technique that may assist children with unique medical or emotional needs: the special needs trust.

Chances are, at least one family in a producer’s client base has a special needs child. Whether because of procrastination, fear or uncertainty, many parents refrain from discussing the critical planning necessary to care for these children. Indeed, special needs children generally have significant financial needs, including medical, residential and mental health care costs, which have increased dramatically in recent years.

Parents of special needs children have three fears: (1) placing the financial burden of caring for the special needs child on someone else at their death; (2) having to pay federal and state estate taxes from the special needs child’s inheritance; and (3) being unable to provide an inheritance to their non-disabled children and grandchildren.

Government programs

Certain government programs, such as Supplemental Security Income (SSI) and Medicaid, are important for people with disabilities in need. They may provide cash benefits, medical coverage and long term care. The income level and financial resources of an individual with a disability, or a family applying on behalf of a child with a disability, must not exceed a threshold to qualify for these benefits. Generally, recipients are allowed to retain only (with some exceptions) $2,000 in assets.

These benefits generally provide only for the bare necessities such as food, shelter and clothing, and amount to less than a federal poverty level income. For parents planning future child care, this poses a problem.

Parents able to care for their child can provide extras beyond the bare necessities, but who will provide those resources after the parents are deceased? Generally, assets valued at more than $2,000 that parents bequeath to a child who is receiving government benefits disqualify the child from receiving those benefits.

Leaving assets to another individual for the care of the child entails other risks–divorce, bankruptcy or fiscal mismanagement–that might preclude proper delivery of those assets. Thankfully, the government has well established rules that allow assets to be held in trust for a recipient of SSI and Medicaid, as long as certain parameters are met.

Trusts for the special needs child

Two trusts may be considered for special needs individuals: the ‘type A’ trust; and the special needs trust.

‘Type A’ Trust

A type ‘A’ special needs trust is used only for special circumstances, such as when the person with a disability has inherited money or received a court settlement. Because the disabled person owns the money, the funds cannot be put into a special needs trust (as described below).

Only a disabled person’s parent, grandparent, legal guardian or a court can establish such a trust. To qualify, the disabled person generally must be younger than 18 and meet the Social Security medical standards. Someone whose level of disability does not qualify for Social Security benefits cannot participate in such a trust.

Additionally, the trust must specify that when the disabled person dies, remaining money will be used to pay the state for whatever medical assistance it provided to the individual after the trust was created. As a practical matter, that means that little, if any, money will be left in the trust.

Special Needs Trust

Special needs trusts represent a significant planning opportunity for producers. Medicaid and the Social Security Administration permit the assets of a disabled person to be placed (without endangering benefits) into such a trust if it is created by a third party (parent, grandparent or court), albeit someone other than the Medicaid applicant or his or her spouse.

The trust should provide that no trust principal or income can be used for any expense that would or could be paid by, or through, Medicaid or other needs-based federal or state program. Rather, it should be designed to supplement only government benefits and provide for “non-essentials.”

The corpus of the trust is generally considered unavailable for purposes of eligibility for Medicaid. All trust distributions are made at the discretion of the trustee and must be distributed to third parties to pay for goods and services for the person with a disability.

The trust can be used for such expenditures as out-of-pocket medical and dental expenses, annual check-ups, transportation needs, payment of insurance premiums, rehabilitation, vacations, goods and services that add pleasure and quality to life, as well as a personal care attendant or escort.

As long as the trust was established when the parent (or other third party) no longer had a duty to support the disabled beneficiary and the trust was not funded with property of the beneficiaries, the state generally has no right of recovery and no right to place a lien against the trust property. Parents can use the trust to provide for a disabled child for life and are free to direct how remaining trust property will be distributed upon the child’s death.

Using life insurance to fund the trust

Funding for a special needs trust can come from discretionary contributions (while parents are alive), probate distributions, a living trust, pension plan or other sources. A single life or survivorship life insurance policy is also a much used option.

Employing life insurance as a funding strategy assures the grantor that financial security will be available for dependants who require perpetual care. Care should be given that the child’s special needs trust, and not the child individually, should be named the policy beneficiary.

Laws governing trusts are complex and subject to changes in legislation that may vary by state, which could affect a special needs child’s eligibility for the government benefits. Recent laws have tightened the eligibility standards, affecting the way a special needs trust is structured. Setting up the trust requires coordinated planning with an attorney who is knowledgeable in special needs planning and can draft a will and necessary trust documents.

Assisting clients by introducing and funding the special needs trust may provide significant value to a client’s most valuable asset: their children. Successfully accomplishing this planning technique may be the most important and assuring decision of your client’s life.

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