Why a Special Needs Trust?
The whole notion of estate planning can be frightening for most families. Discussions about Wills, about “who gets what,” and about family members dying tend to put a real damper on Sunday dinners. Still, these conversations do take place, and they are moments when families come together to discover—often for the first time—what their priorities are.
Special Needs families in particular face additional concerns. Questions about medical and personal care, costs, and other issues steal the spotlight from great-grandma’s cameo, and the answers are not always easy to find. In today’s more mobile world, brothers and sisters may live thousands of miles apart, be only slightly familiar with the day-to-day needs of a sibling with a disability, and there may be nobody (other than an elderly parent; if then), who knows about the day programs he attends, the medical care she gets, and what an inheritance may do to the monthly check that comes. They may need a Special Needs Trust. Advance planning is critical.
There’s a myth that “Trusts are for rich people.” The truth is that Trusts are for anybody. What is a Trust?
A Trust is nothing more (and nothing less) than a written set of instructions for managing money and other belongings—assets. There are many different types of Trusts, and yes, they are sometimes used by the wealthy to preserve assets, especially since some types of Trusts can be used to lower taxes and save money. They are used by middle income and lower income families for the same reason.
Trusts are relatively inexpensive to create, and estate planning is tax deductible. Special Needs Trusts are usually a once-in-a-lifetime investment.
A Trust is created by a person, the Grantor or Settlor, who wants to make certain that certain assets are managed a certain way for a certain purpose. These assets become the money held by the Trust, called the Trust Corpus.
The Settlor can appoint a person (or several people), including himself, to act as the manager of the Trust. This person is known as the Trustee.
In many ways, a Trust is similar to a small company, and the Trustee acts as the CEO, making decisions on investing and spending the money of the Trust.
The Trust is usually set up so that it’s investments and cash outlays work on someone else’s behalf. This Someone Else is known as the Beneficiary. The Beneficiary is the person (or people) who benefits from the Trust.
A Special Needs Trust (or Supplemental Needs Trust) is specifically designed to work for the benefit of a person with a disability. A Special Needs Trust provides a set of instructions for managing money set aside to help a disabled person.
Unlike many other types of Trusts, the U.S. Congress has created a special Federal law permitting the use of Special Needs Trusts. Special Needs Trusts are valid throughout the country. Nobody can legally question the validity of a Special Needs Trust as long as it meets the requirements written into the law.
Among other requirements, a Special Needs Trust must be created for the supplemental care of the person under a disability, not the basic support of that person. It must provide specific examples, unique to each person and their disability, of what is meant by “supplemental care.” It has to be created and managed by a person other than the disabled Beneficiary. It must be irrevocable, meaning that once created and funded, it’s instructions cannot be changed. And it must contain a specific instruction allowing a payback to Medicaid under certain circumstances.
All this is, of course, very interesting (or maybe not). Frankly, it sounds like legalese, which is exactly what it is. So, now we’ve talked about what Trusts are, and we have some idea why they are useful. And we have some ideas about what Special Needs Trusts have to say. But, why a Special Needs Trust? What are the advantages to creating such a Trust?
Special Needs Trusts allow an unlimited amount of money to be held for the benefit of a disabled person without disqualifying him for benefits.
Since so many people with disabilities require extensive medical care (and they may or may not be insurable), they frequently rely on Medicaid to pay for their medical needs. Medicaid covers all medical costs and prescriptions.
Unfortunately, in order to qualify for Medicaid, a person must have virtually no money—$2000.00 in the bank is the upper limit allowed to a Medicaid recipient. In today’s economy, that would barely pay a month’s living expenses, not to mention medical costs.
Medicaid recipients usually receive Supplemental Security Income (SSI), about $500 a month in cash, as well. That’s not very much money to live on.
Still, over a lifetime, Medicaid coverage and SSI payments can total hundreds of thousands or even millions of dollars. The loss of these benefits can be a disaster. Few people can afford to pay so much money out of pocket.
Failing to create a Special Needs Trust means that any money given or left to the disabled person is counted as their asset, and will disqualify the person from benefits.
A Special Needs Trust means there is a pool of funds available for the needs of the disabled person. This pool of funds is not counted as an asset.
This pool of funds can be added to at any time by anyone. It can be funded by insurance or by a personal injury settlement, by a grandpa or by parents, or by the Beneficiary herself (with certain limitations). There’s no limit to the amount of money that can be held in the Trust.
The Trust can own a house or a car, or other items which would otherwise disqualify a person from governmental benefits. The disabled beneficiary can enjoy a comfortable life and still qualify for needed governmental benefits.
The United States Congress has recognized that people with disabilities are entitled to Life, Liberty, and the Pursuit of Happiness, just as any other citizens. Although the rules about governmental benefits limit the amount of money a recipient may have, Special Needs Trusts were specially created by Congress to sidestep these rules and provide to people with disabilities an equal chance to enjoy the inalienable rights with which everyone is endowed.