Special Needs Trusts
By Mark R. Krogstad, Associate Attorney, Davenport, Evans, Hurwitz & Smith Law Firm
Parents of special needs children regularly face the challenges of planning for their child’s care. While every family must ask, “Who will care for the kids if something happens to us,” families with special needs children have even bigger concerns: “Will our estate plan inadvertently disqualify our child from government programs?”
A Special Needs Trust may provide an answer.
What is a Special Needs Trust? A special needs trust is an arrangement where a trustee holds assets on behalf of a beneficiary with disabilities without disqualifying the beneficiary from means-tested government programs, such as Medicaid, SSI, or local and private programs requiring Medicaid-eligibility. Trust assets are managed and administered by a trustee for the sole benefit of the person with disabilities. To qualify as a special needs trust, there are strict regulations regarding the distribution of trust assets. A special needs trust is not meant to replace the funds and services provided through government programs. It is meant to supplement those funds and services and provide for needs not fully funded by government programs.
Who should be the trustee? Although not required, it’s generally recommended that the trustee be a professional fiduciary because the administration of a special needs trust can be more complicated and labor-intensive than most other trusts. The trustee must understand the government programs, the regulations concerning the trust’s administration, how to properly invest funds, make distributions, and pay taxes.
Who contributes the assets? A self-settled special needs trust is created with assets belonging to a person with disabilities. A self-settled special needs trust must be created before the person attains 65 years of age, and any funds remaining at the beneficiary’s death are used to first reimburse Medicaid before passing to anyone else. A third-party special needs trust is established with the assets of a parent, relative, or friend and can be created during a donor’s lifetime or at death as a part of their testamentary documents. An important distinction with a third-party special needs trust is that there is no requirement that the trust assets be used to reimburse Medicaid.
Is a Special Needs Trust the right option? Parents should consider whether means-tested government benefits will be needed or whether their child may wish to participate in programs requiring Medicaid-eligibility. Parents, relatives and friends who wish to provide for a person with disabilities should speak with their advisors to see if a special needs trust is recommended and to carefully coordinate their estate plans to avoid inadvertently disqualifying the beneficiary from these government programs.