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Financial Planning > Trusts and Estates > Trust Planning

Planning For Special Needs

By Lina Storm

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Although the unique care of a family member with special needs can often be a significant concern for clients, the task of planning for a high level of ongoing support and funding may be daunting. And if the client is the primary caregiver, the prospect of how the family member, often a child, will be cared for in the caregiver’s unexpected absence can be overwhelming.

Fortunately, there are government programs, Special Needs Trusts (SNT), and life insurance coverage that can help address and fund the ongoing care needs of a loved one with special needs.

Individuals who are considered as having “special needs” include persons with physical, mental and/or emotional disabilities—derived from either a condition of birth or childhood development, or as a result of disease or personal injury during lifetime. In order to maximize the quality of their lives, individuals with special needs may require additional medical care, special education support, physical, occupational or speech therapies, as well as financial help to adapt their adult living environment to their unique set of needs to establish and maintain a respective degree of independence.

Government Programs

Special needs individuals are entitled to government programs that may include access to residential and medical care facilities that may not be available through a private program even if a client can afford to pay for one. Many of these programs, however, are extremely limited in the types and amounts of services they offer and are not sufficient to address a family member’s many daily life care needs, including medications, education and training needs, living accommodations and aids for independent function, for example.

Clients are often concerned about effectively supplementing what the government provides through Medicaid and Social Security Income (SSI) to ensure that their special needs family member can maintain a quality of life standard though lifetime.

Eligibility for government benefits can be inadvertently jeopardized if personal assets exceed a mere $2,000. This means that any income, such as child support payments pursuant to a divorce decree for example, or even assets a child receives such as gifts or inheritance from parents or other well-intentioned family members will compromise continued eligibility if proper planning does not take place.

It is important to emphasize that clients may want to preserve access to government entitlements because without eligibility for these benefits, specific programs exclusively available through the government and that address a family member’s unique needs currently or in the future may not be available outside of Medicaid, even if a client can afford to pay for them.

Special Needs Trusts (SNT)

A properly drafted Special Needs Trust can be designed to dovetail with government benefits by providing for care and services not covered by those benefits. Accordingly, SNTs endeavor to ensure that any distribution from the trust does not disqualify the special needs individual from receiving on-going government support.

However, the SNT can be specifically tailored to address the ongoing care of a special needs family member without regard to government benefits if the special needs person will not need or qualify for government benefits. Nonetheless, many SNTs are often drafted so that if needs change, the trust will not prevent the beneficiary from qualifying for government benefits in the future.

Generally, there are two types of SNTs, referred to as First Party Special Needs Trust and Third Party Special Needs Trusts, and they can be funded with a variety of different assets, including life insurance.

Types of Special Needs Trusts

First Party SNT

A special needs family member is permitted to transfer his personally-owned assets on a tax-free basis to a First Party Special Needs Trust without being disqualified for SSI or Medicaid eligibility. However, the special needs person cannot create the trust and must be age 65 or younger when the trust is established. Instead, the creator of the trust must be the special needs person’s parent, grandparent, legal guardian, or court.

The primary benefit of a First Party Special Needs Trust is that the personally-owned assets transferred on a tax-free basis to the trust will be disregarded for purposes of Medicaid eligibility. However, in exchange for this benefit, First Party SNTs are required to provide a provision to reimburse the State’s Medicaid agency from the trust balance upon the beneficiary’s death for payments it made on behalf of the beneficiary.

Third Party SNT

Alternatively, or in addition to establishing a First Party SNT, a Third Party SNT (also referred to as a Supplemental Needs Trust) can be established. However, the Third Party SNT must be created by and funded with the assets of a person other than the person with special needs. Unlike the First Party Trust, there is no age limit on the creation or funding of the trust and no Medicaid pay-back requirement at death.

The Third Party SNT can also be used as an estate planning vehicle so that other family members can make gifts directly to the trust to benefit the special needs family member at any time without jeopardizing his ongoing eligibility for government benefits. At death, a residual beneficiary of the trust may be designated to receive the balance of the trust assets, if any.

In this way, the terms of the Third Party SNT can be structured to benefit both the special needs child and a client’s other children provided the trust states that the special needs child is to be the preferred lifetime beneficiary of the trust without regard to the interests of the other beneficiaries.

The Third Party SNT can be established as an irrevocable or revocable trust and the trustee is given complete discretion in making distributions to and for the benefit of special needs child, including the ability to withhold and accumulate income and to maintain maximum flexibility to accommodate changing needs. Alternatively, a client’s last will and testament or revocable living trust can provide for the establishment and funding of a Third Party SNT at death.

Where Life Insurance Fits In

A life insurance policy can be an effective liquidity tool to fund an SNT. The policy can be purchased on the caregiver’s life, typically the client or a member of the client’s family, to replace the loss of services and support due to premature death. Alternatively, life insurance can be used to equalize an inheritance or to create liquidity for the future needs a special needs child.

It also provides cash to fund an SNT over lifetime to enhance and supplement the benefits provided under bare bones government programs.  Moreover, the policy proceeds are received income tax free but may be subject to estate tax, depending on the type and design of the SNT. Finally, the amount of life insurance required can be estimated through the use of a Needs Analysis software specific to special needs.

Practical Considerations When Using an SNT

Coordinating life insurance beneficiary designations

When life insurance is part of the SNT, care should be taken coordinate beneficiary designations properly. The SNT trust should be named as beneficiary for the intended share of the proceeds that are to benefit the special needs child. Otherwise, a direct payment of the proceeds to the beneficiary will forfeit his or her eligibility for government benefits.

Trust assets as part of taxable estate

Keep in mind that the Third Party SNT will be includible in the parents’ taxable estate unless the trust is properly established during lifetime as an irrevocable trust. In this latter case, transfers to the trust during lifetime require a formal lifetime giving program to maximize the use of lifetime gift tax exemptions and to minimize the amount of gift taxes a client pays.

In the course of this planning, if preserving access to government benefits is a priority, it is important that the trust not give the special needs child the right to access the contributions made to the trust through what is referred to as a “crummy power”. The mere right to this power, whether exercised or not, will jeopardize your child’s eligibility for government benefits.

Furthermore, the trust balance of a First Party SNT, net of the Medicaid payback, will be included as part of the special needs child’s estate at death. The trust balance of a Third Party SNT will be included in the taxable estate of the family member who established it if it was not properly established as an irrevocable trust.

Making gifts to benefit a Special Needs Child

Gifts and Inheritances should be planned for in advance and directed to the appropriate SNT to avoid compromising access to valuable government benefits. Whenever possible, the gifts should be directed to the Third Party SNT so as to avoid application of the Medicaid payback requirement associated with a First Party SNT.

Ownership of Assets

Care should be taken, where applicable, to re-title assets if maintaining eligibility for government benefits is a planning objective. That is, continued joint ownership of property between a parent and his or her special needs child will jeopardize ongoing access to government benefits.

Importance of a Letter of Intent

Finally, just as important as the financial and funding aspects of caring for a special needs family member is the need for a daily activity plan that can be outlined in a letter of intent in the event of the temporary or permanent absence of a primary caregiver.

A daily activity plan should provide a guide to anyone who needs to step in to care for your child’s needs. This could be siblings and other family members, designated legal guardians, or the courts who are trying to help in the caregiver’s absence.

The daily activity plan should include information such as vital statistics, emergency contact information, a disabled child’s skills and weaknesses, clothing preferences and needs, behavior, social skills, daily living skills and considerations and use and need of adaptive equipment.

Lina R. Storm CLU, ChFC is director of the Corporate Products Group at John Hancock Life Insurance, Boston, Mass.

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