Special Needs Planning

Most of us have likely known someone in our lives with special needs or the relative of someone with special needs. There are a number of possible disabilities, chronic illness or even acquired health issues than can be defined as handicapped. Along with coping with the stress of caring for someone with special needs, there is also the issue of dealing with how to protect assets that can be used on their behalf. One of the most common tools utilized is that of the Supplemental Needs Trust (SNT), also sometimes known as a Special Needs Trust.

The purpose of such a document is primarily to allow for an individual with such a disability to have a trust that can be funded with unlimited assets, and yet not be recognized as an asset that the individual is accountable for when applying for certain gov’t benefits. There are various benefits that one can qualify for when classified as disabled. Among such benefits there is Social Security disability (SSDI), Medicaid, Medicare, and potentially even subsidized housing assistance.

The trust essentially allows for care on behalf of the individual in excess of that which the gov’t provides. Ordinarily as an example, for one to qualify for Medicaid assistance to aid them in nursing home cost they would have to first spend down a significant portion of personal assets without the proper advanced estate planning. However with a Supplemental Needs Trust, and individual could be declared indigent or impoverished with just a few thousand dollars in personal assets. Yet the trust might potentially have in excess of several hundred thousand dollars.

In most cases the trust is irrevocable, and as such there is a separate tax id number assigned to the trust. It is essentially its own free standing entity. In most cases the trust would be drafted as its own document. However, at times it may be drafted as part of a last will and testament.

In some cases parents have made the mistake of determining that they will leave all assets to their other children with instructions to care for the handicapped individual when they are gone. There are many potential flaws with this approach. Aside from the obvious problem that one sibling may not follow through on your instructions, there are other issues. Leaving an asset to another means it is now part of their taxable estate. It is at risk to estate taxes if they pass away. It is also potentially subject to litigation if they are sued, or go through a divorce proceeding.

What about trustee’s ???

This is a major decision in the drafting of the trust. Often times it is an individual whom is either a family member or close friend of the family that is selected to oversee and disperse the trust. While this may be appropriate in many cases, it is not always the best solution. One possible example is if the disabled individual is in disagreement as to the use of the funds. Perhaps the person suffers from schizophrenia. In such a situation you may not want them calling your nephew, whom you appointed as the trustee at 3 AM in the morning upset over why he has no access to his money. In some cases it is better to appoint a trust department of a bank or an independent professional trustee as the fiduciary. While this may be more costly, it may at times alleviate potential stress and conflict for those who are close to you.

Rules and Requirements

There are some basically rules that typically apply to a SNT. One such rule is the trust must be drafted before the disabled individual is age 65. Additionally there must be some form of a payback provision written into the document. This is essentially a provision in which unused funds at termination would be potentially paid back to gov’t agencies such as Medicaid. However, not all funds are subject to this requirement. As an example, typically funds donated to the trust by parents or another third party would not necessarily be required to be paid back to Medicaid. Yet assets placed into the trust that originated with the disabled individuals earnings from employment or Social Security benefits typically would be subject to a payback provision.

What’s important to understand is special needs planning is a specialty within a specialty. Many estate planning attorneys have limited experience in dealing with this area of estate planning. As such it is important to seek the counsel of an experienced attorney with expertise in this area of estate planning. An improperly drafted SNT may not have the intended benefits. The proper detail required in drafting such a document properly goes way beyond the scope of any one article. Each situation is unique and should be addressed as such.