Special needs trusts, also called supplemental needs trusts, lets a disabled person benefit from trust assets while remaining eligible for needs-based public assistance programs such as Medicaid and SSI. Distributions from a special needs trust are never made directly to the disabled person, because it would risk putting them above each program’s income and resource limits. Instead, trustees distribute assets on the beneficiary’s behalf for things not covered by public assistance but would nevertheless enrich their life.
If you have a disabled child of any age, special needs planning is important to ensure that they are properly cared for throughout their life. Even more important is that be done correctly. An improperly drafted special needs trust can leave the child ineligible for needs-based public assistance and without the financial resources needed to support themselves.
Here are some common mistakes to avoid when planning for special needs.
Failure to plan
Death is an uncomfortable subject. Because of that, many people put off creating an estate plan. If you have a disabled child, putting it off can have long-term repercussions. Failing to create a special needs trust for your child means that any inheritance they receive will pass to them outright. This will immediately make them ineligible for public assistance. At that point they have two options – spend the entire inheritance to regain eligibility or place it in a self-settled trust. The self-settled trust operates in much the same way, but with one major drawback – it requires a Medicaid pay-back provision. That means when the disabled person dies, any assets still in the trust will be used to reimburse Medicaid for payments made during their lifetime.
Cutting the disabled person out of your will
Rather than create a special needs trust, many parents simply leave the disabled child’s inheritance to a sibling or other family member and trust them to care for their child. This is a mistake for several reasons. Reason number one? Money tends to bring out the worst in people and there is no way to guarantee that the family member will spend the money in the way you intended. They may follow your wishes, or they may blow it all on themselves.
Leaving the inheritance to a family member also opens it up to their creditors, makes it available to be divided in the event they get divorced, or can be included in their estate when they die. Each scenario means your child is left with nothing and has no recourse.
A trust, on the other hand, is a legal document that dictates exactly how assets should be distributed. If the trustee doesn’t follow it, the beneficiary can take them to court or have them removed and replaced with one who will.
Not naming the special needs trust as beneficiary on life insurance and other non-probate assets
Non-probate assets, which include life insurance policies and retirement assets, pass automatically outside of probate. Make sure to name the special needs trust as a beneficiary to avoid the assets passing directly to the disabled child, thus making them ineligible for benefits.
Including trust terms that are too permissive
Trusts typically include a standard that allows trustees to make distributions for the beneficiary’s health, education, maintenance, and support. This distribution standard cannot be included in a special needs trust. If it is, the beneficiary will lose their eligibility for benefits, since the trust’s assets will be considered available to pay for anything that would fall within that broad standard.
Instead, a special needs trust should give the trustee absolute discretion to distribute trust assets on behalf of – never directly to – the beneficiary. In addition, distributions can only be used to supplement, never supplant, other benefits the beneficiary may receive. For example, the trust would never make distributions to pay for medical care covered by Medicaid, because that would be supplanting those benefits. The trust could, however, pay for medical care not covered by Medicaid or pay for things that would enrich the beneficiary’s life, such as theater tickets or vacations. Any distribution is made on the beneficiary’s behalf, rather than paid directly to the beneficiary. For example, the trust would buy the tickets and give them to the beneficiary.
Not giving the disabled adult a limited power of appointment
Although the disabled beneficiary cannot receive trust funds outright, they can be given a limited power to control who gets any remaining assets at their death. A limited power of appointment allows the beneficiary to designate in their will who receives the trust’s remaining assets. As the creator of the trust, you can name a pool of people or charities the beneficiary can choose from; this is usually the beneficiary’s spouse, children, grandchildren, siblings, or nieces and nephews, but you can limit or expand the list of acceptable beneficiaries as you wish. If the beneficiary chooses not to exercise the power of appointment, or if they lack the mental capacity to do so, any remaining assets pass according to the terms of the trust.
Not creating a special needs trust for disabled adults
Most people think of a trust as a way to provide for minor children until they are mature enough to handle money on their own. But you can – and should – create a special needs trust for disabled adult children as well.
Not hiring a special needs trust attorney
Special needs trusts are complicated. They require knowledge not only of trust and estate laws, but Medicaid and public assistance regulations as well. An improperly drafted special needs trust can leave a disabled person ineligible for needs-based public assistance and jeopardize their future financial security.
The special needs trust attorneys at The Good Law Group have experience with SSI, Medicaid, and trusts and estates planning and can help you draft a trust that meets your needs and protects the beneficiary’s eligibility for public benefits programs. Call us at 847-577-4476 to schedule a consultation.