Special Needs Trusts: Planning for Families with Special ConsiderationsOct 26, 2020 09:33AM ● By The Hood Magazine
By: Woods, Fuller, Schultz & Smith, PC
In the world of estate planning, a one-size fits all approach does not exist to help families and individuals plan for the future. Instead, estate planning requires consideration of each individual or family’s unique circumstances, wishes, hopes and needs. In the case of families of individuals with special needs, estate planning becomes even more complicated.
One of the primary complications for individuals with special needs are the resource and income limits of many governmental benefits programs. Often, these benefits programs require recipients to remain at or near poverty levels to retain their benefits eligibility. For example, the current resource limit for individuals receiving Supplement Security Income (SSI) through the Social Security Administration is $2,000 for an individual or $3,000 for a couple.
As a result, an inheritance or gift can cause these individuals to exceed income or resource limits and risk a reduction in benefits or even a complete loss of benefits from these programs. Thankfully, planning options exist to provide for these individuals while also preserving their benefits eligibility.
One of the primary tools available are special needs or supplemental needs trusts (“SNTs”). There are two primary types of SNTs available: (1) first party SNTs and (2) third party SNTs. The main differences between these types are whose assets fund the trust and the timing of the trust in the planning process. A first party or “self-settled” SNT is funded with the assets of the individual with special needs. This type of trust is ideal when an individual with special needs receives an outright inheritance or gift or is the recipient of a court settlement.
These trusts are a “retroactive” planning option since they are used to avoid the loss of benefits after the assets have been or will soon be received by the special needs individual. Because first party SNTs are created with a special needs individual’s own assets, there are additional restrictions placed on them. A first party SNT must: (1) be created for special needs individuals under age 65; (2) be created by the special needs individual or their parent, grandparent, legal guardian, or a court; (3) be for the sole benefit of the special needs individual; and, (4) contain a Medicaid payback provision, which is unique to this type of trust.
While special needs individuals can preserve their benefits status through the use of a first party special needs trust, this preservation only lasts for their lifetime and serves as a deferral of Medicaid payback until their death. At the time of their death, the state’s Medicaid or related programs have first right to the trust assets to obtain reimbursement for benefits paid on behalf of the special needs individual during their lifetime.
If any assets remain in the trust after this reimbursement, those assets can then be distributed to family members or other individuals as provided in the trust agreement. Unlike a first party SNT, a third party SNT is funded with the assets of a parent, grandparent, or another person for the benefit of an individual with special needs. Third party SNTs provide a “proactive” planning opportunity for families of individuals with special needs by avoiding an outright distribution of assets to that individual. Instead, third party SNTs are often an additional component of a parent or grandparent’s estate plan and can be funded with most assets, including real estate, life insurance, and investments.
Because these trusts are not funded with the special needs individual’s assets, there is no Medicaid payback requirement at their death. Instead, the person creating the trust determines how the assets are distributed at the death of the special needs individual, such as providing for other children or family members. Despite their differences, however, both first party and third party SNTs provide flexibility in how the trust funds can benefit an individual with special needs. As long as the payments are made directly by the trust or to a third party provider instead of the special needs individual, the funds will not be considered income or countable resources and risk the individual’s benefits eligibility.
Generally, the trust funds can also be used to purchase or pay for various items on the individual’s behalf including clothing; phone, cable and internet services; tuition, books and tutoring; travel and entertainment; household furnishings and furniture; electronic equipment; medical equipment; care management; therapy, medications and alternative treatments; taxes; and, legal guardianship and trustee fees.
It is important to note that these trust funds cannot be used to pay for food and shelter expenses of the individual with special needs. Since food and shelter are the primary focus of most benefits programs, the payment of these expenses by the trust could result in a reduction of benefits or eligibility for such benefits. In this context, food and shelter expenses include not only groceries and other food purchases but also mortgage payments, rent payments, real property taxes, and utilities (i.e. gas, electricity, water, sewer, heating fuel, and garbage). Special needs trusts and supplemental trusts are intended to “supplement” and not replace government benefits. Another important consideration in the use of a special needs trust, is who should be named as the trustee.
The trustee is responsible for managing the assets held in the trust for the special needs individual’s benefit, including making purchases from the trust on the special needs individual’s behalf. In some instances, a family member or trusted friend may be chosen to serve in this role since they have a personal relationship with the special needs individual and understand their needs. Given the unique considerations involved in special needs trusts, however, it is important that family members or friends understand what is required of them in this role.
As another option, a corporate trust company, such as a bank’s trust department, can also serve in this role. Trust companies have experience managing these types of trusts and may provide the special needs individual’s family with reassurance and impartiality. However, trust companies are typically more expensive in terms of the fees charged to serve in this role. Ultimately, the decision of who should serve in this role will depend on each family’s unique circumstances.
While there are various considerations involved in the creation of SNTs, they are a powerful tool that can provide peace of mind for families of individuals with special needs. Nevertheless, given the complexities of estate planning for individuals with special needs, it is strongly recommended that you consult an attorney for assistance in making these decisions. For additional information, contact Liz Krogstad or visit woodsfuller.com.