There are many reasons why the parents of special needs children should plan their estates carefully, even though their assets may not be anywhere close to exceeding their estate tax lifetime exclusion of $11.18 million for 2018 (double for married couples).
In addition to issues of guardianship and the seemingly unending challenge of evaluating what governmental and private resources are available to maximize their child’s quality of life, there are also the complications of the required cap on income and assets when the child is receiving Medicaid or Security Supplemental Income (SSI).
Fortunately, a planning vehicle known as a Special Needs Trust (SNT) can provide parents with a financial backstop for ongoing supplements for their children’s care without jeopardizing eligibility for governmental assistance. SNTs can be used to fund and supplement medical expenses, travel, housing, food, entertainment, pet care and other expenses that can greatly enhance the dependent’s quality of life especially in the future when their primary caregivers are no longer around.
Why Set Up a Special Needs Trust?
The primary purpose of an SNT is to be able to provide future support for a dependent without causing disqualification from government assistance programs. As with many other types of trusts, funds within the trust are shielded from the claims of creditors including credit card companies, landlords and other lenders. Assets within a SNT are overseen and invested by one or more trustees, which may include family members and other independent trusted professionals. Furthermore, for third party trusts, the person who sets up the trust (the grantor) generally has control over where any funds remaining are directed upon the death of the beneficiary.
What are the Options?
Prior to creating a SNT, it is important to decide which iteration of the trust vehicle is best for you and your family. One type of SNT is a first-party or self-settled trust. This is often used when the disabled party owns property prior to the onset of the disability, receives an inheritance outright, or receives a court-mandated settlement.
For parents with a disabled child, establishing a third-party special needs trust is a common solution. These trusts are created and funded by a party other than the beneficiary, and often name an independent party as the trustee or co-trustee.
An important difference between third-party special needs trusts and self-settled special needs trusts is the control of the assets after the death of the beneficiary. Upon the beneficiary’s passing, the trustee of a self-settled SNT is required to use the remaining assets to reimburse any state(s) for the Medicaid benefits received by the beneficiary during his or her lifetime. In contrast, a third-party SNT can designate other beneficiaries, making it a useful planning tool for people who both want to protect the primary beneficiary with disabilities and ultimately control the distribution of assets to others (often within the family).
A very affordable option is an ABLE account (Achieving a Better Life Experience Act of 2014). ABLE accounts are state-managed trusts that are somewhat similar to college 529 Plans. These trusts are funded with after-tax dollars and have certain ongoing income tax advantages for the disabled beneficiary who also is the account owner.
Finally, families can also look at investing in pooled asset trusts managed by nonprofit organizations. In these trusts, assets from several different sources are combined and invested together. The funds are used for beneficiaries in proportion to their share of the total pool. Such trusts may be a good option for caregivers who may not have significant resources to provide for their disabled dependents with the care they currently or likely will need. However, bear in mind that each pool is set up differently and it is important to conduct proper due diligence on all available options.
In an era when estate and trust solutions are available online, I strongly advise seeking legal expertise in order to best meet family needs and resources. The laws surrounding SNTs and other possible solutions can be extremely complex and the rules surrounding welfare programs ever-changing. Any mistakes could put the beneficiary’s ability to access government assistance at risk, and thus be extremely costly.
Planning ahead for the care of dependents struggling with disabilities involves much time, research and patience. SNTs play an important part in that planning process. By taking the time to source the best available option for your loved ones, you can help to best maximize their quality of life and ensure they receive the care they need both now and long after you can no longer provide it.
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