Protecting the health and welfare of your family: A guide to special needs trusts

Protecting the health and welfare of your family: A guide to special needs trusts

What is A Special Needs Trust (also known as a Supplemental Needs Trust)? Generally, a special needs trust, which is sometimes referred to as a supplemental needs trust or SNT is a legal entity designed to provide assets and income to physically and/or mentally disabled persons without affecting their eligibility for federal and/or state public benefit programs. The assets in a properly drafted SNT will not be deemed countable assets and will not affect the financial calculation for programs that have financial qualifications such as SSI and Medicaid. Why Do I Need A Special Needs Trust? If you have a child, other relative or other intended beneficiary who has disabilities or other special needs, there may be public assistance benefits available to help pay the expenses for some of those needs. Utilizing a special needs trust allows you to assist that individual without affecting his/her ability to receive those benefits. The most common types of public assistance benefit programs available for adults with disabilities are Social Security Disability Income (SSDI) Supplemental Security Income (SSI) and Medicaid. SSDI is available to a disabled person with a work history or a family relationship with someone with a work history. SSI provides cash assistance for those who do not have a work history and have minimal resources. In theory, these (and other) public assistance programs are designed to cover the costs of the disabled person s non-medical necessities like food and shelter (i.e. rent in subsidized housing) while Medicaid covers the costs of medical services. These programs, designed for those who are medically and financially needy, have asset and income limitations. If the person has too many assets, she or he may not qualify. At present, an adult will not qualify for SSI/Medicaid if the person owns in excess of $2,000 in countable assets. Countable assets typically include items such as cash, bank accounts, stocks, U.S. savings bonds, retirement accounts, cash value of life insurance and beneficial interests in many different types of trusts (but not SNTs). Obviously, the reasonable cost of a person s subsistence, particularly one with disabilities and related needs, is often far more than a monthly SSI check coupled with Medicaid coverage and $2,000 in savings. There are many items that individuals with disabilities need but are not considered necessities and therefore not paid for by public assistance programs such as: Uninsured therapies and/or other uninsured medical expenses; Educational and vocational programs; Recreation and entertainment, such as vacations and related travel, attendance at cultural events, subscriptions, club memberships and hobbies; Transportation (private or public); Home furnishings, such as furniture, appliances and audio-visual equipment; Family visitation and/or other companionship; Gym membership or other physical fitness expenses, such as for equipment or personal training; Personal care items; and Uninsured caretaker expenses. A well drafted SNT allows a disabled individual to maintain financial resources to live a more comfortable lifestyle than can be provided by sole reliance on public assistance benefit programs. 1.

How are Special Needs Trusts Funded? SNTs can be funded with assets from the disabled individual (D4A trusts) or with assets from a third party, typically a parent, grandparent or other family member or guardian (Third Party SNTs). D4A trusts have to contain certain payback provisions. While disabled individuals have access to the funds they contributed to a D4A trust during their lifetime, when they die, the trust must use any funds remaining to pay back federal and state public benefit programs. Third Party SNTs do not have a payback requirement. Consequently, any funds remaining upon the death of the disabled individual can be passed on to whomever the trust creator chooses. What Types of Assets are Typically Used to Fund a Special Needs Trust? Generally, parents, other family members or guardians fund the SNT by making a bequest in their will or by making the SNT a beneficiary of their life insurance policy. Often, the disability is the result of an accident and the SNT is funded with a personal injury settlement. Assets from inheritance or insurance are treated similarly in setting up the SNT. Settlement funds, however, have additional requirements to establish and fund the trust correctly. Often, the trust creation and funding occur concurrently with the final settlement of the personal injury case. Your counsel will need to work closely with your personal injury attorneys to ensure that all necessary requirements are met. Does My Special Needs Child Maintain Any Control over the Special Needs Trust? No, the child/beneficiary should not have any control over the SNT, including no control over its assets, income, distributions or Trustee selection. It is important to establish this lack of control clearly in the provisions of the SNT. Although there may be leeway to provide some small allowances of control to the beneficiary, these should be only considered after a thorough review with your counsel because any deviation from the strict provisions of the law can result in the entire trust becoming a countable asset thereby affecting disability benefits. What Is the Role of the Trustee? A trustee s duty is to administer and invest the assets of the trust properly. He/she must oversee the financial management of assets held in the trust and be able to manage the investments, assemble an accounting, seek counsel for long term care planning, know government benefit programs and, most importantly, be able to get along with the disabled person and his/her caretaker. The trustee must be well versed in the dos and don ts of special needs trust administration. The trustee must be aware that he or she cannot provide any benefits to the beneficiary that could in any way undermine the intent of the trust. As administering a trust can be quite difficult for one individual, most trusts provide that the trustee can pay for support and counsel in the areas in which they need help. In this way the trustee is authorized to hire a care manager, accountant, lawyer or other professional if necessary for the fulfillment of his/her duties. 2.

Who Should Be The Trustee(s)? Deciding on a trustee (and his or her successors) is likely the most critical decision you will make when creating a special needs trust. This individual or individuals will become responsible for properly interpreting and carrying out your intentions in creating the trust. In general, whomever you name as the trustee has a legal fiduciary responsibility to act in the best interest of the trust beneficiaries at all times. A trustee can be a family member, close friend, trusted professional or any combination thereof. Each type of trustee has its pros and cons. For example, naming family members, friends, and/or neighbors, or others not sophisticated in the proper administration of such trusts can cause family discord. They may not have sufficient time and may lack the skill set to manage the property placed in the trust effectively. On the other hand, a special needs child will likely be familiar with them and comfortable dealing with them directly. An independent corporate/professional trustee poses other concerns. There is a cost associated with hiring a professional and family members may be more attuned to the everyday needs of the beneficiary, especially if they change suddenly. On the other hand you get what you pay for may apply. A paid professional might be the best option for ensuring that all the trust terms are fully understood and complied with and those assets are invested appropriately for income, capital appreciation and preservation of capital. Financial Considerations In addition to all the considerations discussed above, there are a few basic financial considerations to remember as well. 1. Determine what benefits may be available to the disabled person now and in the future. Will public housing be an option either realistically or financially? Is senior housing an option? Do you live in a town where the senior housing is available and comfortable or is there a long wait list for inadequate housing? Would the individual be more comfortable in a group home setting if the primary caretaker were unable to provide the care? Is there a work history such that the disabled person will be entitled to SSDI and if so, what is the expected income. 2. Given the likelihood of certain benefits, determine what amount of money is necessary to carry out the purposes of the trust. In other words, out of my current assets (or my assets at the end of life), how much must be set aside for my special needs child as opposed to my other children, in order for the trust to operate as I imagine. The answer to this question will be different for everyone, but a reasonable starting point for determining the number begins with a basic understanding of the types and amount of extras you anticipate the trust will provide, how frequently, and how much they cost (both now and taking inflation into account). You should also reflect on the disabled person s life when you are not around. For example, are you providing most of the transportation? Are you providing shelter? Do you provide for most of the disable person s entertainment expenses? You need to add these expenses to your calculation of the disabled person s expenditures when you are no longer able to provide for these services. 3. Determine when and how should you fund the trust? The trust can be funded during your lifetime or at your death. This choice will depend largely on your personal circumstances. If you have a substantial estate, you may decide as part of your tax planning to fund a SNT during your life. It is useful to keep in mind however that once assets are gifted to the trust they generally cannot be returned to the donor. In other words, you will not be able to get it back for your own personal use except if it is allowed under the terms of the trust. If you have a more modest estate, you may choose to hold onto your assets during your life and fund the trust at your death through inheritance or with life insurance proceeds. In all cases, you should review with your attorney, any funding of a SNT and the impact it has on your estate planning. 3.

Typical Planning Mistakes Oftentimes, well-intentioned people leave assets directly to their child with special needs. As a result, the child is forced to spend-down these assets up-front before they can become eligible for government benefits. This causes an immediate expenditure of their inheritance, and also leaves the child without an ability to receive extras once the assets are spent-down a clearly undesirable result. It is also common for parents to completely disinherit their child with special needs because they want to preserve what resources they do have for their non-disabled children. This is often based on the mistaken belief that the state will provide a comfortable living for their child with a disability. However, in stark contrast, disinheriting a child with special needs can be tragic, and can result in family friction over the moral obligation of other siblings to provide for that child. Finally, in a quest to protect assets, people often forget to look at asset transfers from their own estate planning or tax perspective. There are many traps for the unwary that may occur by making transfers without considering all implications. Be sure you are not solving one problem by creating another. Conclusion Special Needs Trusts are an effective way of protecting assets for the long-term benefit of disabled loved ones. The SNT can provide extra amenities that would otherwise disqualify the disabled beneficiary from public benefits while providing you with the piece of mind that his or her financial future is well-protected. SNT rules, however, are complicated and unforgiving and you should always consult an attorney when creating and administering a special needs trust. This publication, which may be considered advertising under the ethical rules of certain jurisdictions, is for informational purposes only and not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Prior results do not guarantee a similar outcome. BOWDITCH & DEWEY, LLP BOSTON OFFICE ONE INTERNATIONAL PLACE 44TH FLOOR BOSTON, MA 02110 FRAMINGHAM OFFICE 175 CROSSING BOULEVARD SUITE 500 FRAMINGHAM, MA 01702 WORCESTER OFFICE 311 MAIN STREET P.O. BOX 15156 WORCESTER, MA 01615-0156 T 508 416 2471 F 508 872 1492 www.bowditch.com 4.