Protecting a Disabled Child or Adult
A Special Needs Trust is a type of trust designed to protect assets for a person with a disability. The disabled person typically receives governmental benefits like Medicaid or Supplemental Security Income (SSI). The assets protected by the Special Needs Trust are used to supplement, but not replace his or her governmental benefits. The failure to properly use the trust assets could result in reduction or elimination of the beneficiary’s government benefits. The allowable uses of the Special Needs Trust assets include special education, entertainment, caregivers, etc.
1. What type of client might benefit from a Special Needs Trust?
A special needs trust is generally used for disabled children or adults. The trust is designed to benefit the child or adult in a way that does not cause them to be disqualified from receiving need-based government benefits such as Medicaid or Supplemental Security Income (SSI). Examples of typical uses for special needs trust are:
A disabled child or adult has a severe physical or mental disability and qualifies for Medicaid or SSI benefits that would be lost if the child received an inheritance outright.
A disabled child or adult receives a monetary settlement which will cause the disqualification from Medicaid or SSI benefits.
The receipt of an inheritance by a disabled child or adult that is already qualified for Medicaid or SSI benefits will likely cause the government benefits to be terminated. However, if the parents or grandparent’s estate planning provides that the disabled child’s share of the estate is distributed to a Special Needs Trust for the benefit of the disabled child (called a third party Special Needs Trust), the Medicaid or SSI benefits can be protected.
If a disabled child or adult were to receive a monetary settlement or payment, the receipt of such funds will cause the termination of any government benefits. If however, those assets are transferred to a Special Needs Trust for the benefit of the disabled child or adult (called a first party Special Needs Trust), the government benefits can be protected.
2. How does a Special Needs Trust work?
Generally, a Special Needs Trust provides that the trustee has total and absolute discretion whether to make any distributions to or for the benefit of the disabled person. This will result in the assets of the trust not being treated as owned or controlled by the disabled person. Medicaid and SSI will pay for the medical expenses and basic living costs for the disabled person, but the assets in the special needs trust can be used to supplement the ‘special needs” of the disabled person, such as allowing the person to travel or take vacations.
3. How does the client benefit from a Special Needs Trust?
The client knows that a child’s inheritance or settlement proceeds will not be consumed by medical expenses or other expenses. This is a great sense of relief for clients who are concerned about their children or grandchildren when they will no longer will be alive to protect and care for them. The Special Needs Trust enables the inheritance or settlement proceeds to be used to supplement the “special needs” of the disabled child or adult while protecting any government benefits they may be eligible for.
4. What does the attorney do in these types of engagements?
The role of the attorney is to prepare the appropriate Special Needs Trust for the client to provide the necessary protection for the disabled child or adult. The laws regarding Special Needs Trusts are very complicated and if the trust is drafted improperly, it can cause the disabled child or adult to lose government benefits they would otherwise be entitled to. Also, a probate court may be required to authorize the Special Needs Trust and the attorney would have to obtain the court authorization.
5. What are the client’s responsibilities?
Primarily, the clients need to alert the estate planner to the special needs of a beneficiary they want to benefit. The client will need to decide who they want to act as the trustee of the Special Needs Trust. It is always recommended that a back-up, or successor trustee also be selected.
6. Are there different types of Special Needs Trusts?
There are two different types of Special Needs Trusts, in order to understand Special Needs Trusts, it is critical to distinguish between the two types.
First Party Special Needs Trust: A first party or self-funded Special Needs Trust contains assets belonging to the person with the disability. An example of when a first party Special Needs Trust would be necessary is when a disabled person who is a Medicaid and/or SSI recipient subsequently receives an inheritance or settlement from a lawsuit. In the absence of a Special Needs Trust, the disabled person would no longer be eligible for SSI or Medicaid benefits if their countable assets exceeded $2000. The first party Special Needs Trust must be created by a parent, grandparent, legal guardian or court for a disabled person who is less than age 65. It also must provide that upon the death of the disabled person, the state will be reimbursed from the trust any medical benefits paid. This is a “payback provision” and it is designed to ensure that the state will be paid back if there are assets remaining in the Special Needs Trust upon the disabled persons’ death.
Third Party Special Needs Trust: A third party Special Needs Trust contains assets belonging to someone other than the disabled person. An example would be a parent or guardian establishing a Special Needs Trust to hold their own personal assets for a disabled child or grandchild. Typically, this would involve a Special Needs Trust being established as a part of their will or revocable trust or as a separate, stand alone trust. Unlike the first party Special Needs Trust, there is no age 65 limitation. Anyone can establish a third party Special Needs Trust and the state need not be paid back upon the death of the disabled person.
7. How do I get started?
Contact our office and arrange a time to come in to discuss your Special Needs planning options. A Special Needs Trust can be an extremely valuable tool for protecting assets for disabled persons. Too often, instead of utilizing a Special Needs Trust, the parents of a disabled child will disinherit their loved one. This sadly leaves the disabled person with only his or her very minimal government benefits. To make sure your disabled loved one is taken care of, consult with an experienced elder law attorney.
This blog post is written by Brett A. Howell, Certified Elder Law Attorney. The blog is written as a service of The Elder and Estate Planning Law Firm, P.L.L.C. This information is for general informational purposes only and does not constitute legal advice. For a consultation to address specific questions, please call (810) 953-3846.