No one likes to think about his or her own mortality, so it’s no surprise that few people put estate planning at the top of their to-do lists. But to ensure that your wishes are carried out, you need to have an estate plan. And if your child, spouse or another family member is disabled, an estate plan featuring a special needs trust (also known as a supplemental needs trust) may be even more critical.
Avoid planning by default
Everyone has an estate plan, whether they know it or not. If you haven’t developed your own, the government has one for you: In the absence of a will or living trust, state law determines how your wealth will be distributed when you die. For a typical family, that isn’t necessarily a bad thing because in most states your assets are divided equally among your children or between your spouse and your children.
But if a family member is disabled, failure to plan can have disastrous consequences. For one thing, an inheritance likely will disqualify that person from receiving government benefits that would otherwise help pay for his or her care.
Assist without jeopardizing eligibility
A special needs trust provides resources to ensure that a disabled family member receives the care he or she needs. It places responsibility for managing the assets with a qualified trustee, and it protects the assets from creditors and fraudsters. Perhaps most important, it allows you to assist a loved one without jeopardizing his or her eligibility for government benefits.
Federal assistance programs, such as Medicaid and Supplemental Security Income (SSI), pay for basic medical care, food, clothing and shelter. But those benefits are unavailable to a person with more than $2,000 in “countable resources.” These include cash or other liquid assets, real estate, or any other property that’s readily converted into cash. Certain assets don’t count toward the $2,000 limit, including:
- A home (with some exceptions),
- One car (subject to value limits),
- A small amount of life insurance,
- Burial plots or prepaid burial contracts, and
- Personal effects and household items, such as furniture, appliances, clothing and jewelry.
Assets placed in a properly designed special needs trust don’t belong to the beneficiary, so they won’t disqualify him or her from Medicaid or SSI benefits. For this strategy to be effective, however, the trust must limit use of the assets to expenses the government programs don’t pay for, such as noncovered medical expenses, insurance, education, transportation, recreation, entertainment and travel.
There are several ways to fund a special needs trust, including cash, stock, real estate or life insurance. Generally, it’s advisable to make the trust irrevocable so the assets are removed from your estate and sheltered from estate taxes — though contributions may be subject to gift tax.
Word the trust carefully
A special needs trust requires precise language to ensure that it protects your beneficiary without interfering with government assistance. For example, it should give the trustee sole discretion to make distributions and prohibit him or her from using the funds for support items covered by Medicaid or SSI. For added protection, the trust document should explicitly state your intention to use the assets for only nonsupport expenses.
Although not required, you may want to provide specific instructions about the types of expenses the trust should pay, such as educational costs or travel expenses for visiting family members.
Special care must also be taken in drafting Crummey withdrawal powers. To preserve the annual gift tax exclusion for contributions, most trusts give beneficiaries the right to withdraw funds contributed to the trust within 30 days (or some other time period) after they’re contributed.
But with a special needs trust, Crummey powers likely would disqualify the beneficiary from government assistance. One possible solution to this problem is to name another family member as remainder beneficiary and give that person the right to withdraw contributions. Tread carefully, though, as this is a particularly unique area of estate tax law that has innumerable traps for the unwary.
Finally, be sure to discuss the special needs trust with your family and friends. They must know that, by providing financial assistance directly to your beneficiary, they might unintentionally disqualify him or her from receiving government benefits. Explain to them that the best way to help is to make gifts to the trust.
Provide a safety net
If a disabled family member will require a nursing home, assisted-living facility or other long-term care after you’re gone, the cost can be enormous, so you’ll need to tap every resource at your disposal. A special needs trust allows you to leave as much as you can for your loved one while making the most of government assistance.
