Estate Planning and Third Party Special Needs Trusts

While all of our loved ones are important to us, when establishing a comprehensive estate plan we need to give extra attention to those individuals who have special needs. Not only must we consider the value and types of assets that these individuals will receive, but we also need to pay close attention to how these assets will be administered for their benefit and how the government assistance that such individuals receive will be affected by this new financial resource.   In many cases, a Special Needs Trust may be an appropriate tool to supplement the care of such individuals while preserving their inheritance over their lifetime.

How Does a Special Needs Trust Work?

Whether or not the inheritance is considered a “resource” for purposes of determining if an individual can receive certain means-based government benefits is extremely important when planning for a beneficiary with special needs. If the individual’s resources exceed a certain threshold (generally a very low level) then the individual is not eligible to receive such benefits. In general, a sum of money that is devised to an individual under a will or standard trust agreement would be counted as a resource of that individual for purposes of determining if they can receive certain means-based government benefits. However, if the devise is left to such individual in a properly drafted Special Needs Trust, that money will not be counted as an available resource for that beneficiary, and they can continue to receive government benefits despite the money that is held for their benefit in the Special Needs Trust. The Special Needs Trust contains language that the funds in the trust are not to supplement government benefits, but to supplement them. In practical terms, this means that your gift to that beneficiary can be used to supplement their care while they continue to receive government benefits to provide for their support.

Why Would I Consider a Special Needs Trust if I Have Significant Wealth?

Often clients are initially resistant to planning options that are designed to protect means based government benefits simply because they feel that the inheritance they are leaving the individual with special needs will be enough to provide for that individual without the need for government assistance. However, when you begin to consider the high cost of health care for individuals with special needs, even a large inheritance can be exhausted in a short period of time.

Consider, for example, if you leave a gift of $500,000 to your mentally handicapped niece as part of your Revocable Trust who currently receives SSI and Medicaid benefits. If this gift is left to her under a standard trust or as an outright devise under your Will, it will be counted as a resource for her and she will become ineligible for the means based benefits she is currently receiving. If her care costs are $100,000 per year, then depending on the rate of growth of her inheritance, this gift will only pay for approximately 5 years of care. After that time, your niece will again have no financial resources and will have to apply for public benefits to provide for her care.

If instead, the gift of $500,000 is left to your niece in a properly drafted Special Needs Trust, managed by an individual or corporate trustee, that inheritance will not be considered a resource for purposes of means based benefits eligibility. Since that gift will not disqualify her for the benefits she is receiving, she will continue to get those benefits to pay for her care and support. The money in her Special Needs Trust can be used to supplement that care by paying for extra therapies, entertainment, comfort items and other goods and services to enhance her quality of life. The inheritance can continue to grow and provide benefits to the beneficiary for decades instead of being immediately exhausted. Also, with a testamentary Special Needs Trust, there is no required payback to the state for Medicaid benefits paid on behalf of an individual during his lifetime. If the special needs individual passes, the funds in the Special Needs Trust can go to other beneficiaries as provided in the trust.

Who Is Going to Manage the Special Needs Trust?

One of the challenges of planning for a beneficiary with special needs is that often the person putting together the estate plan is the person who has been caring for this individual throughout their lifetime. There are frequently concerns about who will care for the beneficiary and who will ensure that the money that is left will be properly managed and administered for the benefit of the special needs beneficiary. While a Special Needs Trust is a great planning tool, the administration of such Trust should be handled with special care to ensure that the Trustee is not doing anything that adversely affects the beneficiary’s government benefits. For this reason, consider a corporate or professional Trustee who has experience in managing these types of Special Needs Trusts.

If you would like to further discuss how Special Needs Trusts work or discuss whether this planning tool may be appropriate to incorporate into your estate plan, please contact one of our attorneys to discuss any questions you may have.