Special Needs Trusts Pros, Cons, and FAQs
Many people meet with me about the pros and cons of setting up a Special Needs Trust. It’s my honor when they confide in me about the needs of a loved one, especially a child and their heartfelt desire to protect them now and in the future, especially when they pass. Here are some general answers to the most common questions I’m asked by clients when evaluating the creation of a Special Needs Trust.
1. What is a Special Needs Trust?
A Special needs trust (also known as “supplemental needs” trust) allow a disabled beneficiary to receive gifts, lawsuit settlements, or other funds and yet not lose his or her eligibility for certain government programs. Such trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining eligibility for public benefits.
As their name implies, special needs trusts are designed not to provide basic support, but instead to pay for comforts and luxuries that could not be paid for by public assistance funds. These trusts typically pay for things like education, recreation, counseling, and medical attention beyond the simple necessities of life. (However, the trustee can use trust funds for food, clothing, and shelter if the trustee decides doing so is in the beneficiary’s best interest despite a possible loss or reduction in public assistance.) Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (such as specially equipped vans), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment and appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses.
Often, special needs trusts are created by a parent or other family member for a child with special needs (even though the child may be an adult by the time the trust is created or funded). Such trusts also may be set up in a will as a way for an individual to leave assets to a disabled relative. In addition, the disabled individual can often create the trust himself, depending on the program for which he or she seeks benefits. These “self-settled” trusts are frequently established by individuals who become disabled as the result of an accident or medical malpractice and later receive the proceeds of a personal injury award or settlement.
2. Can a special needs trust buy a house?
Yes. A Special Needs Trust can buy a house and there are often good reasons to do so. However, there are some strict rules under SSI law and under New Jersey Medicaid regulations that must be considered before making that decision.
3. Can a special needs trust buy an automobile or van?
Yes. A Special Needs Trust can buy an automobile or a van but insurance is often difficult to arrange. It is usually better for the trust to lease the motor vehicle.
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4. Can a trust pay for vacations?
Yes. A Special Needs Trust can pay for vacations, but there are guidelines about using trust funds on vacation that include other family members.
5. Can a special needs trust pay parents for the care of a child?
In New Jersey it is very difficult for a Special Needs Trust to pay parents for the care of a child under age 18. This is because the assets of a Special Needs Trust under New Jersey Medicaid regulations cannot be used to discharge a parental obligation of support. If the child is over 18, then yes, the parent can be paid for the care of an adult child. But while recent changes in social security regulations have made payments to parents for care much more rigorous and challenging, it can still be done.
6. Who gets the assets left in the special needs trust on the death of the beneficiary?
Under Federal law for one type of SNT, the State Medicaid Agency must be paid back for any benefits paid to the beneficiary of the Special Needs Trust. If there are assets remaining after repayment to Medicaid, they go to those beneficiaries named in the trust document. Not so with a Supplemental Needs Trust. There is a no pay back requirement. The trust creator can direct all trust funds remaining to whatever beneficiaries he or she designates. Go back to the home page where I discuss this subject in more depth.
7. Does a person on SSD need a special needs trust?
SSD carries with it Medicare. Neither SSD nor Medicare is means tested. However, there are often other reasons why a person on SSD might need a Special Needs Trust. For example, if there is a chance that person may eventually reside in group home paid for by Medicaid, a Special Needs Trust should be considered. The answer is therefore more difficult and requires more discussion and analysis.
8. Can a special needs trust distribute cash to the beneficiary?
Any cash distributed by a Special Needs Trust to a beneficiary will reduce his or her SSI payment dollar for dollar. If the SSI payment is eliminated, Medicaid will be lost. It is not good practice for a trustee of a Special Needs Trust to distribute cash. Cash payments to SSI beneficiaries should seldom be done. It’s a landmine that can blow up public benefit eligibility.
9. Are Special Needs Trusts subject to taxes?
There are income, gift and estate tax considerations in establishing and administering a Special Needs Trust. These must all be carefully considered.
10. Who is a good choice to serve as a trustee?
That’s a simple question but requires a complex answer. Sometimes it’s best not to have a family member serve as a sole trustee of a Special Needs Trust. The combination of a family member and a professional trustee is often a good arrangement. I can be talked into just selecting a trusted family member especially if they are age appropriate and trustworthy. Picking the right trustee is really important.
11. How can I protect a special needs trust from those who prey on vulnerable persons?
Predators are particularly attracted to vulnerable beneficiaries, such as the young and those with limited self-protective capacities. When you plan with trusts, you decide who has access to the information about your children’s inheritance. This protects your child and other family members, who may be serving as trustees, from predators. There are several legal safeguards built into a Special Needs Trust to add further protection for a loved one.
12. Can others contribute to my child’s special needs trust?
Yes, they can. One key benefit of creating a trust now is that your extended family and friends can make gifts to the trust or include the trust in their estate planning. You can also consider whether making the trust the beneficiary of a life insurance policy makes sense now, while you are healthy and insurance rates are low. In these cases, the special needs trust should be irrevocable rather than revocable.
13. Why is it important to have an attorney who is knowledgeable in special needs trusts?
It is important that a special needs trust not be unnecessarily rigid and generic. Although an attorney with some knowledge of trusts can protect a beneficiary. The issue is whether they can create a trust from invalidating the child’s public benefits. An attorney without special needs experience may not know how to customize the trust to the particular child’s needs, and the child may not receive the benefits that the parent provided when they were alive.
Another mistake attorneys without special needs experience make time and time again is putting a “pay-back” provision into the trust rather than allowing the remainder of the trust to go to other family beneficiaries upon the special needs child’s death. While “pay-back” provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your family hundreds of thousands of dollars, or more.
14. Why not just disinherit a child with special needs?
Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. You may have been advised to disinherit your child with special needs – the child who needs your help most — to protect that child’s public benefits. But these benefits rarely provide more than subsistence. And this “solution” does not allow you to help your child after you are incapacitated or gone.
When your child requires or is likely to require governmental assistance to meet their basic needs, you should consider establishing a special needs trust.
15. How do I choose a trustee?
Choosing a trustee is one of the most important and difficult issues in special needs trusts. The trustee must have the necessary expertise to manage the trust, including making proper investments, paying bills, keeping accounts, and preparing tax returns. A professional trustee will have these skills but may be unfamiliar with the beneficiary and his unique needs. For those who may be uncomfortable with the idea of an outsider managing a loved one’s affairs, it is possible to simultaneously appoint both a professional trustee and a family member as co-trustees. It’s also possible to hire a trust “protector,” who has the power to review accounts and to hire and fire trustees, and a trust “advisor,” who instructs the trustee on the beneficiary’s needs. However, if the trust fund is small, a professional trustee may not be interested. Make sure that whomever you choose is financially savvy, well-organized, and, most important, ethical.
16. Can I create a special needs trust and still be eligible for Medicaid and SSI?
Each public benefits program has restrictions that the special needs trust must comply with in order not to jeopardize the beneficiary’s continued eligibility for public benefits. Both Medicaid and SSI are quite restrictive, making it difficult for a beneficiary to create a trust for his or her own benefit and still retain eligibility for Medicaid benefits. But both programs allow two “safe harbors” permitting the creation of special needs trusts with a beneficiary’s own money if the trust meets certain requirements.
The first of these is called a “payback” or “(d)(4)(A)” trust, referring to the authorizing statute. “Payback” trusts are created with the assets of a disabled individual under age 65 and are established by his or her parent, grandparent or legal guardian or by a court. They also must provide that at the beneficiary’s death any remaining trust funds will first be used to reimburse the state for Medicaid paid on the beneficiary’s behalf.
Medicaid and SSI law also permits “(d)(4)(C)” or “pooled trusts.” Such trusts pool the resources of many disabled beneficiaries, and those resources are managed by a non-profit association. Unlike individual special needs trusts, which may be created only for those under age 65, pooled trusts may be for beneficiaries of any age and may be created by the beneficiary his- or herself. In addition, at the beneficiary’s death the state does not have to be repaid for its Medicaid expenses on his or her behalf if the funds are retained in the trust for the benefit of other disabled beneficiaries. (At least, that’s what the federal law says; some states require reimbursement under all circumstances.) Although a pooled trust is an option for a disabled individual over age 65 who is receiving Medicaid or SSI, those over age 65 who make transfers to the trust will incur a transfer penalty.
17. Can Life Insurance Be Used to fund a special needs trust?
A parent with a child with special needs should consider buying life insurance to help fund the special needs trust set up for the child’s support upon death. What may look like a substantial sum to leave in trust today may run out after several years of paying for care that the parent had previously provided. The more resources available, the better the support that can be provided the child. And if both parents are alive, the cost of “second-to-die” insurance — payable only when the second of the two parents passes away — can be surprisingly low.
18. Will trust income affect SSI eligibility?
Income paid from a special needs trust to a beneficiary will reduce SSI benefits by one dollar for every dollar paid to him or her directly. In addition, payments by the trust to the beneficiary for food or housing are considered “in kind” income and, again, the SSI benefit will be cut by one dollar for every dollar of value of such “in kind” income. Some attorneys draft the trusts to limit the trustee’s discretion to make such payments. Others do not limit the trustee’s discretion, but instead counsel the trustee on how the trust funds may be spent, permitting more flexibility for unforeseen events or changes in circumstances in the future. The difference has to do with philosophy, the situation of the client, and the amount of money in the trust.
19. Why not pass the money on to another child if they promise to take care of my disabled child/grandchild?
Some parents choose to avoid the complication of a trust by leaving their estates to one or more of their healthy children, relying on them to use the funds for the benefit of their disabled siblings. This is not a solution that will protect your child because it creates great risks to the security of the funds transferred.
- What if your child with the money divorces? His or her spouse may be entitled to half of it and will likely not care for your special needs child.
- What if your child with the money dies or becomes incapacitated while your special needs child is still living? Will his or her heirs care for your special needs child as thoughtfully and completely?
- What if your child with the money loses a lawsuit and must pay a large judgment or has other significant creditor problems? The court will certainly require your child to turn that money over to the creditor.
In addition, this can create a burden for the child or children holding these “morally obligated” funds. Can he or she spend them on herself and her family? If so, how much is belongs to each? This approach can also create rifts among the other siblings, as some may spend the funds for their own needs and some for their brother or sister.
Except in the case of a very small estate, the share of your estate going to your child with special needs should be placed in a trust for his benefit.
20. How can I leave money to a child with special needs?
In almost all cases where a parent will leave funds at death to a child with special needs, this should be done in the form of a trust. Trusts set up for the care of a child with special needs generally are called “supplemental” or “special” needs trusts.
Money should not go outright to the child, both because he or she may not be able to manage it properly and because receiving the funds directly may cause the child to lose public benefits, such as Supplemental Security Income (SSI) and Medicaid. Often, these programs also serve as the entry point for receiving vital community support services. In the case of SSI, at the end of 1999 Congress enacted laws making it much more difficult to create a trust for a disabled individual after she has received an inheritance, making it even more important that the parents create the trust as part of their estate plan.
21. What is a plan of care?
Where is your son going to live when he can no longer live with you? Will he move in with a sibling? Or into a group home? Who will make the decision? Who will monitor the care he receives? It’s never too soon to begin answering these questions and making sure that the living and support arrangements are in place.
In some cases, it can ease the transition for all concerned if the child moves to the new living arrangement while his parents can still help with the process. In many parts of the country, non-profit organizations and private consultants can help set up the plan, research available options, and assist in the move.
It will help everyone involved if the parents create a written statement of their wishes for their child’s care. They know him or her better than anyone else. They can explain what helps, what hurts, what scares their child (who, of course, is an adult), and what reassures him or her. When the parents are gone, their knowledge will go with them unless they pass it on.
This plan of care, often called a “Memorandum of Intent,” should also include all the basic information anyone taking over from the parents should have, such as the name and contact information for the child’s doctor and information on any medications he or she takes. This document should be updated on at least an annual basis.
22. When does it make sense to set up a special needs trust?
If you have a disabled child – such that your child is unable to work and hold a job or can only work part-time and in a limited position- the Special Needs Trust should be part of your estate plan.
23. Is there a limit to the number of dollars that can be in this trust for the benefit of a disabled person?
No. We have created trusts that will ultimately hold as little as $30,000 and we have created trusts that hold in excess of $3,000,000.
24. Does the special needs trust for my disabled child or family member replace my will or other trusts I’ve set up?
No. Your existing will or trust will continue to hold your assets as long as you live. In most cases, the disabled child’s inheritance will be distributed from either your will or existing trust to the Special Needs Trust at the time of your death.
25. Will money go into the special needs trust for my child while I am living?
It can if you want to set it up that way. Typically, the trust is funded or receives money only upon your death, but many people prefer to set up SNTs while alive, especially grandparents or parents of adult disabled persons. You might also decide whether to gift or transfer money into the trust while you are living. Doing so raises several tax issues about which you must obtain appropriate advice.
26. What can the money in the trust be used for?
Generally speaking, money in the trust can be used to pay for items and services that are not provided to the person by the public benefits system. For example, money in the trust can buy the beneficiary a television or pay someone to be the individual’s companion while at home or while on a trip.
27. Why should I bother with the trust? Why not leave everything to my disabled child’s brother and let his brother take care of the money?
It is important to have dedicated funds irrevocably devoted to the disabled child. His brother, his sister or other family members, however well meaning, could face a divorce or be sued or die before his disabled sibling. In any of these circumstances, the money could be lost and become unavailable.
28. Who should be the trustee of a special needs trust?
The trustee should be someone who is very responsible and who will be devoted to the beneficiary. This is often a relative, although it can be a professional fiduciary or “professional trustee” if no family member is available. This is a very complicated question that you must discuss with your attorney who understands these types of trust.
29. What happens with money remaining in the trust when the beneficiary dies?
If you create this trust for the benefit of your child, money remaining in the trust goes to individuals you name in the Special Needs Trust. It is up to you. Alternatively, remaining assets can go to your favorite charity.
30. Does this mean that the state will not be paid back the money for the child’s medical care?
That is correct, most times. When parents establish a trust for a child, which is most typical, the state does not get its money back.
31. If a disabled person inherits money, can a special needs trust help?
Yes. In most circumstances, a disabled individual who is receiving public benefits can shift inherited assets – or other assets he receives – into such a trust without disturbing eligibility for public benefits. The trust will typically be created by his parents or through the Courts. He cannot establish it himself, although his money can go into it. If this is done, the state does have the right to reimbursement for any benefits that it pays.
32. Can a person who receives federal disability benefits and Medicaid own a car?
Yes. If you receive Social Security Disability Insurance (SSDI), there is no limit to how many cars you can own. However, if you receive Medicaid or Supplemental Security Income (SSI), you can own only one car, of unlimited value.
If you are searching for a special attorney, someone who is experienced, likeable as a person and professional, call Mr. Niemann. I felt good about my choice.
—Frank Mollo, Manchester, NJ
Bottom Line: I know that the above was an exhaustive list of questions and answers. Maybe now you think it’s time to plan for a Special Needs Trust. If you have a disabled child, or a loved one who is receiving or may receive public benefits, this trust may be right for you. It can be an essential part of your estate plan.
Find out more. Call our office today.
Ask me to personally discuss your New Jersey Special Needs Trust situation toll-free at (855) 376-5291 or e-mail me at firstname.lastname@example.org.