This week, we’re going to be talking to someone who we’ve had the pleasure of having on our podcast multiple times: estate planning attorney Chess Griffin. We’ll be discussing the very important topic of special needs trusts. If you haven’t heard the podcast yet, we encourage you to listen to it yourself.
But, as always, we’re going to be covering all the fine details of the podcast in this post so that you have quick access to this information any time that you like.
What are Special Needs Trusts?
A special needs trust, often called a supplemental needs trust, is generally created when a person has a family member who is on an assistance program, such as Social Security Disability or Medicaid. The trust allows you to provide for this family member without disqualifying them from these programs.
Oftentimes, clients want to create a trust when their child has a disability.
How Do Special Needs Trusts Actually Work?
For example, let’s look at a standard situation where a person has adult children who are all mature and doing fine. Often times, a trust would be created for these children that allows them to take money out of the trust at a specific time.
Trusts can be created to allow these children to take money from the trust at age 30, or any age that you desire.
However, when dealing with a child who has special needs, you may not want them to access these funds freely. When a person can draw money from a trust, Medicaid or disability will look at a person’s available assets.
If a trust is an available resource, the person may become ineligible for some of these special need’s programs, such as Medicaid. A special needs trust can be drafted in such a way that it allows the trustee to take money out of the account to fill supplemental needs.
Beneficiaries of a special needs trust cannot draw from these accounts, but the trustee can have broad power to access the funds for the beneficiary’s supplemental needs.
Special Needs Trust for Minors
If a person has special needs as a minor, you can still create a supplemental needs trust to safeguard them in the event that you die prior to your child reaching adulthood. What many people do is create trusts for their children at a very young age.
What you can do, and it’s quite common, is:
- Create a regular special needs trust for your child
- Add specific language into the trust in the event the child does become special needs
Your child may be perfectly healthy now, but if they become disabled in the future, the right language in a trust can protect your child’s best interests.
When we use the term “special needs,” it’s also important to understand that this term is usually connected to a person receiving some form of government assistance. However, while many people that are beneficiaries of these trusts are on government programs, it’s not always the reason for creating these types of trusts.
Chess has drafted numerous special needs trusts where the individual may never apply for Social Security disability or Medicaid. These trusts are often drafted “just in case.” The beneficiary may never qualify for these programs, but their parents create a trust just in case they do qualify at some point in the future.
A child’s condition can progress, but if the child can live independently and may never qualify for benefits, the trustee can then distribute the money to them in the future.
Special needs trusts cover the what ifs of:
- What if the child’s condition progresses and they become eligible for these programs?
- What if the condition never progresses?
Since these trusts are for special needs, they’re often created with the idea that the parents are deceased when the funds are distributed. A third-party often becomes a trustee of the account. When the trust is created, you can create an outline of the things to keep in mind if something happens to the parent.
The trustee almost becomes a guardian to the individual, and these directions and guidance can help the trustee act in the best interests of the beneficiary (whether they’re 10 or 60).
How are Special Needs Trusts Funded?
Special needs trusts can be funded with cash, but can they be funded with life insurance? Yes. A lot of these funds are funded with money from life insurance. The one asset that is never a good idea to help fund a special needs trust is a retirement account.
Due to the required minimum distributions of retirement accounts, the special needs trust can be very complex.
Is the Trustee Responsible for the Trust’s Investment?
Yes. The trustee has a fiduciary duty to manage the trust’s assets. Trustees can seek out professionals to help them with the investment side of the trust so that the trust can continue to grow.
Where are Checks and Balances for a Special Needs Trust?
A beneficiary may not be mentally able to know what checks and balances are for their trust. The trustee has a lot of power, and it’s possible to abuse this power. Estate agencies are often in charge of these assets, and they have a legal right to act in the best interest of the beneficiary.
However, the reality is that there’s little oversight of the trustee.
There are certainly times when the trustee uses the funds inappropriately. When drafting the trust, it’s so important to choose the trustee properly so that you reduce the risk of the fund’s misuse.
Can a Person Create Their Own Special Needs Trust?
A third-party trust, when it’s created for someone else, is very common. But what happens if you have a condition and are concerned that you may be mentally or physically unable to manage your own money and assets?
Can you create a special needs trust for yourself?
Yes, but it’s very complex and complicated. Complexity occurs when a first-party trust is created because it’s a very murky area of law. Medicaid looks at an applicant’s assets and transfers.
Medicaid will look at transfers, and the lookback period is often five years.
So, the issue exists when you’ve created a trust for yourself in the last five years, transferred your assets into the trust and applied for one of these programs. Medicaid, for example, doesn’t want recipients to hide their money to leverage the system.
An expert would be needed to draft one of these first-person accounts because it can be difficult to meet eligibility requirements of special needs programs.
Special needs trusts are an important part of estate planning, and it’s important for you to think about creating trusts for family members who may need supplemental help in the future. These trusts can protect assets while ensuring that the beneficiary can still leverage important programs with strict eligibility requirements.