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Special Needs Trust

Special Needs

Don’t Make this Common Terrible Special Needs Planning Mistake

by Evan

I was reviewing a client’s estate plan the other day, and was shocked to see this very common special needs planning technique.   It isn’t a rare technique, and it seems very natural but is often a terrible idea.  The document provided that the child with special needs was proactively disinherited.  More often then not it is a terrible idea to fully disinherit a child (who actually may be an adult at the time of draft) with special needs in favor of the other children.  Not only is it a terrible idea it could be actually be considered legal malpractice depending on the State you are in. (See Board of Overseers of the Bar v. Ralph W. Brown, Esq., 2002 Me. LEXIS 190 (Me. October 25, 2002)).

It i seems like a natural testamentary intent to say I will leave all my assets to a the typically developed child and he or she will take care of the child with special needs.  Why is it so dangerous?

What if the inheriting child has a creditor-judgement against him or her? Now those assets which were supposed to be used for your child with special needs benefit is subject to fulfilling a judgment.  Does the inheriting child own a business? is it possible that he or she uses the assets to prop that business up?

What if the inheriting child gets divorced? In some states inheritance is separate property for purposes of divorce, but that is not a permanent reality due to transmutation which is the process whereby separate property turns into marital property for equitable distribution.  How does it happen? Simple commingling can do it in some cases.  So typically developed child takes his or her inheritance and drops it in a joint account with their spouse – boom your child with special needs is now going to have their inheritance chopped in half because your son or daughter in law cheated on your child.

Wanting to do the right thing is not always enough.  Just because you know your typically developed wants to take care of your child with special needs doesn’t mean they are equipped with the tools to do so.  Maybe they are really good at the day to day activities but have they ever managed a portfolio?

How much do you trust their spouse?  Does the spouse have the right ethics, morals and care that your children have?

I know these are cynical “what-ifs” but it is such a ridiculous notion to include this in an estate plan when there is a simple solution.

What is a Third Party Special Needs Trust (Supplemental Needs Trust)

If your attorney can’t explain the concept, and you have a special needs child GET A NEW ATTORNEY.  Put succicently by NOLO,

A third-party special needs trust is the typical type of trust used to benefit a person with special needs.  Commonly, family members create a trust for a loved one with special needs and leave property in the trust through their estate plan (their will, trust, life insurance, or other beneficiary designation). Learn more about How to Leave Property to a Special Needs Trust.

The trustee of the trust uses trust funds to support the person with special needs. When doing so, the trustee must carefully abide by trust requirements – trust funds cannot be used for anything that would make the beneficiary ineligible for benefits, such as cash gifts.  But the trustee may use trust funds for many other things, including classes, hobbies, luxury items, personal services, furniture, professional fees, computer equipment, pet supplies, transportation, and vacations. The beneficiary never owns the property in the trust and does not have direct access to trust funds.

A 3rd party SNT is not to be funded by the assets of the child because that would make it is a self settled 1st party special needs trust which follows different rules (namely, Medicaid payback).  As indicated by the quote the funds are used to supplement the child’s life not supplant properly administered government benefits.

I know how easy it is to ignore this issue, but much like picking a guardian it is better you handle it now then allow the Courts to figure it out after you are gone!

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Special Needs

If You Have a Child With Special Needs Please Be Careful When Making Financial Moves

by Evan

The office I work at has a prominent Special Needs Planning department, and when meeting with one of the planners on a separate case he to me a horrible about parents making financial decisions without fully understanding the ramifications to their child with special needs.  The situation is probably more common than you would expect a Child with Special Needs who is on SSI & Medicaid with loving parents and grandparents.  Well, Grandpa transferred a Uniform to Minors Account (UTMA) into the name of the Child (who is of majority age) and then Mom and Dad spent some of the money as legal guardian for the benefit of the child.

This seemingly  innocent move caused the Child to be kicked off of Medicaid and a large bill was then sent to Mom and dad.  Why?  Medicaid is a means based program that is provided to people with very little assets.  The transfer to child put assets into his name, and when Medicaid found out they basically said, “If you have assets you have to use them first and pay us back for money we already spent.” When looked at it that way, I think it is pretty fair.

How to Avoid Getting Kicked of Medicaid with a Special Needs Child?

I don’t know about their particular situation nor do I know your particular situation, so nothing I am going to is legal or financial advice.  Notwithstanding standard the CYA language there are a two moves that could have been looked into to prevent the horrible result.

Create a First Party Special Needs Trust

A First Party Special Needs Trust, also known as a D-4a Trust (named after the particular Federal Statute) is a trust funded with the assets of the Child with special needs.  The assets are then used to “supplement not supplant” the child-beneficiary.  Upon the death of the child the assets are used to pay back the Medicaid lien.  If there are no assets to pay back the government, then so be it…however if there are assets after paying back the government the ultimate beneficiaries receive the remainder.

Create a Third Party Special Needs Trust

If a “first party” SNT is a trust created with the Child’s own assets then a 3rd Party SNT is funded with anyone else’s assets besides the child. The benefit? From Wikipedia

Generally, a properly drafted third-party, discretionary trust is not countable as an asset available to the beneficiary receiving Supplemental Security Income (SSI) and/or Medicaid benefits. Such a trust must be created by a party other than the SSI/Medicaid beneficiary, must not receive any assets belonging to the beneficiary, and must be restricted (not accessible or available) to the beneficiary.

Again, assets are not there to supplant government benefits, but just to supplement them.  It may seem trivial but it is a big deal because if the assets are deemed to be “available” to the child then the assets will count.  When is an asset available? When the Child can direct payment to himself or his creditors.

Are these the only two options? No, but these are just two simple solutions that would have avoided the result of losing Medicaid.

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Special Needs

Planning for Children with Special Needs Part III – The Third Party Special Needs Trust

by Evan

Disclaimer: You should always check with your financial or legal professional before estate or financial planning especially when dealing with as sensitive and advanced subject such as Children with Special Needs. This is the Third Part of a multi-post series on planning for children with special needs.

Part I – Introduction

Part II – Letter of Intent

This post is an introduction to 3rd Party Special Needs Trusts which are also sometimes referred to as Supplemental Needs Trusts.  Let me start with this caveat – this area of planning involves both federal and state statutes so consider this post a high view of Third Party Special Needs Trusts.  It should be noted that there is a type of trust known as a First Party Special Needs Trusts – we will go into them another time.

Why Do You Need a Special Needs Trust?

There are a myriad of governmental benefits that are available to those that meet the government’s definition of disabled.  Specifically, if your child receives (or is expected to receive SSDI) then it is likely that they will, at some point, receive Medicaid.  Medicaid is a means based governmental benefit, so if you have more than $X the benefits are stopped.  At this point you should be asking, What is your point? From wikipedia

Generally, a properly drafted third-party, discretionary trust is not countable as an asset available to the beneficiary receiving Supplemental Security Income (SSI) and/or Medicaid benefits. Such a trust must be created by a party other than the SSI/Medicaid beneficiary, must not receive any assets belonging to the beneficiary, and must be restricted (not accessible or available) to the beneficiary.

So, any money we get into this “box” doesn’t count towards the assets to determine whether the child (or adult) is eligible for Medicaid.

Special Needs Trusts at Death

Lets say you have 3 children named A, B, & C.  C is disabled according to the Government’s Definition.  Two Common Situations that are WRONG:

  • Your Will gives all Three Children Equally –> Well then C will be cut off from Medicaid and the amount given to him or her will be eaten by medical bills QUICKLY.
  • Your Will gives to A & B in hopes they take care of C –> HORRIBLE IDEA! What happens if A gets their share drops it in her marital bank account and then gets divorced? I’ll tell you what happens that ex-son in law is taking a piece.  What happens if B’s Spouse doesn’t feel like taking care of C? What happens if A starts doing the crack?

I truly feel that people fail to set up a Third Party Special Needs Trust in their Will for a couple reasons (none which are good):

  • Ignorance – not a bad type of ignorance, just a lack of education – if you know someone in this category you better send this post over to them!
  • Wrong type of Attorney – SNTs are not in the ‘run of the mill’ Will or estate plan, nor are they in those ridiculous home Will Kits.
  • Denial – This is the WORST excuse.

If you have a child with special needs that may need government benefits one day, it is your responsibility to get your Will in Order

Special Needs Trusts During Life

You might be thinking, alright I get why I need it for my “death plans” why do I need to set up an inter vivos Special Needs Trust?  By the way, inter vivos, just means during life.

Two Main Reasons:

  • Even if you do not want to fund the trust – you should set it up as a receiver from other people.  For example – you can create one and then when Rich Uncle wants to gift some money to the child with special needs he can without messing up that child’s benefits.
  • You are preparing for your child’s future with a Life Insurance Policy to supplement the child’s needs once you die.

Some Additional Notes

These types of trusts should be drafted by an attorney with experience.  Do not be their first it will cost you an arm and a leg while they learn the Ins and Outs.

Hope you enjoyed this is a brief introduction to Third Party Special Needs Trusts

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Special Needs

Planning for Children with Special Needs – Part II Letter of Intent

by Evan

Disclaimer: You should always check with your financial or legal professional before estate or financial planning especially when dealing with as sensitive and advanced subject such as Children with Special Needs. This is the Second Part of a multi-post series on planning for children with special needs.

Part 1 – Introduction

Step One Create a Letter of Intent

I think the first step that every parent of a child with special needs must complete is the creation of a Letter of Intent.  A Letter of Intent is not a legal document. The easiest way of thinking of a Letter of Intent is as an instructional manual for your child when you pass away.

This isn’t the type of document that says I want money to go to XYZ, but rather the type of document that says Johnny loves ABC food, needs to go to bed at this time, and learns well with this tool.

What should a Letter of Intent Include

Some of the items which should be included:

  • Family Tree
  • Hopes, wishes goals for your child
  • What type of activities does your child enjoy
  • Your religious desires for your child
  • Child’s daily activities
  • A summary of your experiences with your child
  • Education/Employment Schedule
  • Current Medical Doctors and schedule
  • ANY OTHER INFORMATION YOU MAY DEEM IMPORTANT

Any specific items you think should be included?

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Special Needs

Planning for Children with Special Needs – Part I Introduction

by Evan

Disclaimer: You should always check with your financial or legal professional before estate or financial planning especially when dealing with as sensitive and advanced subject such as Children with Special Needs.

I have no idea the reason, but I love estate planning and I hope that enthusiasm comes through on this blog.  There is something about creating a plan that:

  • Distributes a client’s assets pursuant to their testamentary intent;
  • Helps out a generation (or two) receive assets in an orderly manner;
  • Minimizes taxes so the family increases the amount that goes to their pockets of those you love.

There is a particular situation that affects many more families then one would expect – where one or more of the children have some sort of special need.  For purposes of our discussion (in this part and subsequent parts), those referred to having special needs will have some sort of diminished physical or mental capacity.

Extra Attention Needs to be Taken when Planning for a Child with Special Needs

Extra special care needs to be taken care of when planning for a child with special needs.  Easy Example: You are married; Have 3 children  – 1 of which is on government benefits and 2 which are not; both Spouses pass away…what happens? Some questions which need to be planned for:

  • Does anyone know how to care for the child?  I know of some families with an autistic child that if you don’t do the bedtime activities in the right order, that kid is not going to bed!
  • Have plans when that child turns 18 and becomes a legal adult?
  • How is going to inherit their share?
  • Are you going to disinherit that child and hope that the other children take care of him or her? What happens if that spouse gets divorced – that amount might be subject to a divorce proceeding?
  • Are you going to give that child their share and watch (hopefully from above) your hard earned money get shifted to the government?

These are just some of the questions I hope to answer in this multipart series.  I only ask two things:

  1. If you know anyone with a child with a special needs SHARE!
  2. If you have any questions ASK!
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