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.
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.