Special Needs Trusts

There are situations where estate planning is less about asset protection, avoiding taxes, and probate fees, and more about protecting people we care about. In other situations, it is necessary to plan for someone with special needs and protect assets at the same time. When we talk about special needs planning we are talking about planning for people who have physical disabilities as well as mental capacity issues. We have also utilized special needs planning to assist parents in protecting children with substance abuse problems from time to time.

If there are special needs concerns in your family, the estate plans of parents and grandparents must be carefully thought out and monitored to meet objectives beyond probate avoidance and federal estate tax minimization. Parents and relatives of special
needs children should have their estate plans designed to ensure adequate care throughout the lifetime of their family member, while at the same time not disqualifying them from any governmental assistance.

Although it may seem like a good idea, parents and grandparents are strongly discouraged from establishing custodial accounts or leaving cash outright to minor children with special needs. The reason for this is that once that child reaches the age of majority under state law (18 in Connecticut) the custodial account is distributed to the child. The distribution itself may have the effect of disqualifying them from government assistance, which is means-based.

When the assets of an individual with special needs exceed the governmental financial resource limits, the individual may be disqualified from both Supplemental Security Income (SSI) and Medicaid until the disqualifying funds are “spent-down.” Spending down is the process in which a person’s estate assets are spent, to bring the estate into the appropriate financial status to qualify a person for Medicaid.

Special Needs Trusts can be either self-settled Trusts, or third-party Trusts. A self-settled Trust is a Trust set up with the disabled persons own assets. The disabled individual is the Grantor and the beneficiary. A third-party Trust is created by one person (the Grantor) for the benefit of another, so long as the Grantor is not legally responsible for providing support for the disabled individual.

A Special Needs Trust containing certain provisions may be established to administer and distribute Trust assets to a beneficiary with special needs without otherwise disqualifying them from governmental benefits. If drafted properly, the assets in the Trust are not counted for the purpose of determining eligibility for governmental benefits. A properly drafted self-settled Special Needs Trust will require the Trust to pay back the government after the death of the special needs individual for governmental benefits provided to the individual. If the assets are depleted then they do not need to be reimbursed. Special Needs Trusts should be drafted with care. The instrument should not direct the Trustee to make disbursements for a disabled person’s heath, maintenance or support as this will cause the Trust assets to be includable in determining eligibility for governmental benefits. One way to accomplish this goal is to give the Trustee absolute discretion on disbursements. When distributions are up to the Trustee’s sole and absolute discretion, the assets in the Trust are not counted when calculating eligibility for governmental benefits.

Special Needs Trusts can be a valuable tool in planning for disabled individuals. The process requires consideration of many issues and should be approached with care by qualified professional.