If you have ever planned for an important event in the future like a birthday, vacation, or wedding, then you know there are plenty of things that can go right, and plenty that can go wrong. For everything that can go wrong, we attempt to create a contingency plan. Unfortunately, a few things will remain unforeseen. In a moment when the unforeseen arises, it is how we handle the situation that tests our resolve and that of those around us. This same thought applies to building, structuring, and executing an estate plan that can have life long consequences for those with special needs. Too often the estate planning process is seen as a necessary evil that requires everyone to get their financial affairs in order before an untimely catastrophe. However, when you add in the added concerns of protecting special needs individuals from outside predators or from losing government benefits, it is then that we realize it is our responsibility to plan for every possible contingency. In this article we will discuss two types of special needs trusts and how they can provide financial support to qualifying individuals.
What Is A Special Needs Trust
When I sit down and complete estate document reviews with clients the first thing I ask them is, “What do you want to happen in the event of your premature death or disability?” Then I follow up with, “What do you think your existing document(s) say?” The answers to these two questions are very telling. The discussion that follows gets people thinking about who they want their assets to pass on to, how they want their assets to be used, and whether the parties receiving the funds are qualified to manage those assets. In many situations an individual or couple will state they want to make sure their designated heir(s) receive the designated funds outright for use as the heir sees fit. However, that statement implies the assumption that the heir is of sound mind and fiscal responsibility. When asked if their decision would change in the event one of the heirs were disabled, they typically say yes, but are not sure what to do. This is where a special needs trust can offer some answers.
In recent years I have become more and more interested in special needs planning due to my oldest daughter. Since a young age, she has struggled with some executive functioning, fine motor skills, and speech processing. While watching her grow has been an absolute blessing, it has also posed many uneasy questions about her quality of life as she gets older. In fact, she became my inspiration to provide special needs financial planning to families and obtain my Chartered Special Needs Consultant designation from The American College of Financial Services. During my training to become a CERTIFIED FINANCIAL PLANNER (TM) I learned a lot about trust and estate planning, but it was not until I took the Chartered Special Needs Consultant curriculum that I learned much more about the benefits of special needs trusts.
So what is a special needs trust? Essentially, special needs trusts are a mechanism by which those deemed disabled, and who qualify for government benefits such as Supplement Security Income and Medicaid, can shelter their own assets or assets given to them by other people. Determining which type of trust should be used depends on where the money to fund the trust originates. For this reason, it is important to understand that there are three types of special needs trusts; the self settled trust, the pooled income trust, and the supplemental needs trust. For the purposes of this article we are only going to focus on the self settled trust and the supplemental needs trust.
The Self Settled Trust
In many instances I talk about protecting children with qualifying disabilities from losing their government benefits, but in reality that is a small portion of the population. Once an individual reaches the age of majority, they are no longer treated as a child, and all planning for their assets meet the self settled trust guidelines. A self settled trust is one that can be established by the special needs individual, a parent, a grand parent, a guardian ad litem, or the court. The purpose of this trust is to allow the individual with special needs to transfer their assets into an irrevocable trust that will be used for the individual’s benefit at the full discretion of the trustee. Two important benefits of this trust are:
- This funds distributed from this trust for the benefit of the grantor and use to supplement the grantor’s lifestyle does not disqualify the grantor from continuing to receive government benefits. **Note, there are other technical rules that need to be followed to make sure the special needs individual is not disqualified for government benefits.
- Medicaid frowns upon individuals who shelter their assets in a trust for a period of five years prior to requesting financial assistance for Medicaid. This is known as the medicaid look back period. Self settled trusts are an exception to this rule because it is understood that upon the death of the special needs individual, any funds left in the trust will be used to reimburse Medicaid first for all expenses paid. If any assets are left over, then those funds can pass on to other heirs.
Supplemental Needs Trust
Otherwise known as a third party trust, a supplemental needs trust provides supplemental financial support for the benefit of the special needs individual. This trust is funded from an inheritance and designed to benefit the special needs individual during their life. Upon their death, any residual assets pass on to other heirs. Similar to the self settled trust, this trust requires an independent trustee. The trustee is then required to have full discretion of whether funds will be paid to support the special needs individual. Therefore, it is very important to make sure that the designated trustee, and successor trustee are understanding of the individual’s needs as well as what the grantor’s wishes were when the financial assets were given. This trust has the same benefits as the self settled trust mentioned above, but with one exception. Since the funds that were deposited into the trust were funded by a third party, AND the beneficiary never took receipt of the money, then Medicaid does not have any claim over any residual assets in the trust at the special needs individual’s death.
To understand the impact and benefits of special needs trusts, you first need to complete your own estate plan. To do this we advise all clients to work with an special needs attorney and a qualified financial professional, like a Chartered Special Needs Consultant, to map out what your net worth will look like late in your life. Then once you understand what kind of financial assets you could have and where you want your remaining resources to go, you need to make sure you build in some contingency planning. Remember, while leaving someone an inheritance can change their life, it would be unfortunate if that same inheritance forced them to lose government benefits.