09/24/2016

Special Needs Planning


One of the most important aspects of estate planning for families with a special needs child (no matter what age) is to preserve the child’s eligibility for public benefits such as Supplemental Security Income (SSI), Medicaid, and subsidized housing.   Many parents seek a way to leave an inheritance for a disabled child without providing direct access to the money which would lead to the child to be declared, at least temporarily, ineligible for public benefits.  Some consider leaving the special needs child’s inheritance to the other children, with the expectation that the siblings will take care of the disabled child. 

One solution is to use a special type of trust knows as a special needs trust or supplemental needs trust that directs how assets left in the trust are to be managed and distributed.  The person who creates the trust is called the Grantor, while the manager of the trust assets is the Trustee (either a person or a corporate entity).  The Trustee then manages the trust assets for benefit of the beneficiary, the special needs person.

 Establishing a special needs trust means that trust assets are protected and are not counted against the individual in determining eligibility for public benefits.  In addition to preserving eligibility, the funds in the trust can be used to purchase things beyond what public benefits may pay for such as transportation, telephone, education, rehabilitation or therapy, dental coverage, health insurance premiums, companion services, durable medical equipment, vacations, grooming, computers, clothing, and entertainment.

There are three types of special needs trusts and each has specific provisions and/or limitations.

A first party trust is one in which the beneficiary's own assets are used to create the trust. This type of trust is also called a self-settled trust or a d4a trust in reference to the subsection of the federal law that created the type of trustThis will often be appropriate when the beneficiary has received an inheritance or a court settlement that would otherwise result in disqualification from government benefits. The government benefits will be preserved as long as:

  • The beneficiary is under the age of 65.
  • The disability meets the definition/standards of the Social Security Administration.
  • The trust specifies it is for the personal benefit of the beneficiary.
  • The trust is established by a parent, grandparent, legal guardian, or a court.
  • The trust contains a Medicaid payback provision, which means that after the beneficiary dies, the state will receive all amounts remaining in the trust up to the amount that was paid out by Medicaid for health care expenses.

 A third party trust is one for which assets are provided by someone other than the beneficiary. Typically a parent or grandparent establishes the trust to specifically preserve the beneficiary's eligibility for government benefits.  This can be done in a stand-alone trust, in a revocable trust or by provision in a will.  As with the first party trust, the age and disability definition apply. However, the trust is not required to include a Medicaid payback provision, and the Grantor may specify the disposition of any trust assets remaining at the death of the beneficiary.

 A pooled trust is established and administered by a non-profit organization to manage and pay out the assets of many individuals' special needs trusts with each beneficiary having an individual account.  If an individual with a disability enters a pooled trust with his/her own resources to create the trust, it must generally meet the requirements of a first party trust.  However, a pooled trust does not have a maximum age limit, and it is the only special needs trust that can be established for a disabled person over the age of 65.  Perhaps the main benefit of a pooled trust is that it handles small accounts, providing people of modest means access to sophisticated trust services such as investment decisions, accountings, tax preparation and trustee services.  In Northern Virginia, pooled trusts are administered by The Arc of Northern Virginia and Commonwealth Community Trust.