Parents of a child who is receiving benefits from a needs based government program (or might be eligible for such benefits in the future) must pay careful attention to their estate planning. The options available for leaving assets to the child are:
- ● Disinherit the child, leaving the child with no financial means beyond government benefits;
- ● Leave assets to the child, causing disqualification from government benefits until the assets are spent down;
- ● Leave assets to a sibling of the child or another family member to use for the child, trusting that person will not use the funds for himself, or lose them through personal circumstances such as a divorce or a lawsuit;
- ● Leave assets to a Special Needs Trust.
The best option to provide financially for a child with special needs is a Special Needs Trust.
What is a Special Needs Trust?
A trust is a legal entity that holds assets for someone’s benefit. The creator of the trust
puts property into the trust and names a trustee to manage the property and distribute it to the beneficiary according to the provisions in the trust. A Special Needs Trust places limitations on the types of distributions that the trustee can make, so that trust distributions will not disqualify the beneficiary from eligibility for government programs.
Two Types of Special Needs Trusts
Self Settled Special Needs Trusts
A Self Settled Special Needs Trust is funded with assets that belong to the disabled beneficiary. For example, if a child becomes disabled as the result of an automobile accident, and receives a substantial settlement from litigation, the settlement funds belong to the child. If the child is eligible for government assistance, the parents can create a Self Settled Special Needs Trust to receive the settlement funds.
Third Party Special Needs Trusts
A Third Party Special Needs Trust is established by a third party with assets of the third party, for the benefit of the beneficiary. An example would be the parent of a Down Syndrome child creating a Special Needs Trust for the child as part of the parent’s estate plan.
A Third Party Special Needs Trust can be created in a Will, or can be created and funded during lifetime. A trust created during lifetime is called an “intervivos” trust. If a family member wants to make lifetime gifts to the child, or leave assets to the child by Will, an intervivos Special Needs Trust can be created to receive those assets.
Special Needs Trust Distributions
To protect the assets in a Special Needs Trust from being counted as a resource in determining the beneficiary’s eligibility for needs based programs, a Special Needs Trust directs the Trustee not to pay for services provided for by a government agency. The Trust authorizes distributions only for the beneficiary’s special or supplemental needs. Examples of distributions that might be made for a beneficiary’s special needs include specialized therapies, dental care, exercise equipment, computers, cable tv, cultural events, athletic contests, movies, and the services of a care manager
Improper distributions from a Special Needs Trust can cause the loss of public benefits. For example, if a beneficiary receives SSI and Medicaid, cash distributions from the Special Needs Trust to the beneficiary will reduce the Beneficiary’s SSI. If the cash distributions exceed the monthly SSI payment, the beneficiary will lose SSI. If Medicaid qualification was based on receiving SSI, the beneficiary will also lose Medicaid.
Who Should be Trustee of a Special Needs Trust?
Because of the importance of making proper distributions, the trustee should be someone
who either already knows or is willing and able to learn the requirements of the government programs that provide benefits to the beneficiary. The trustee could be a family member or a financial institution. Often people will name a family member and a financial institution as co-trustees, because the family member knows the beneficiary and understands his or her special needs, while the financial institution has the expertise to manage the assets and follow the distribution rules.
How is a Special Needs Trust Established?
Not all attorneys have the knowledge to prepare Special Needs Trusts. You should consult with an attorney in your home state who has experience drafting Special Needs Trusts and advising Trustees.
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