If you have a spouse, child, sibling, parent, or other loved one who is physically, mentally or developmentally disabled—from birth, illness, injury or drug abuse—he/she may be entitled to government benefits (Supplemental Security Income and/or Medicaid) now or in the future. However, most of these benefits are available only to those with very minimal assets.
Like many others, you may find yourself faced with a difficult choice. If you leave a substantial inheritance to this person, he/she will be disqualified from receiving the government benefits which may be crucial for his/her care. On the other hand, you may not want to have to disinherit this person in order to preserve these benefits.
There is a third option. With a special needs trust you can provide for a disabled child or other loved one without interfering with his/her benefits.
The special needs trust should be very specific in stating that its purpose is to supplement government benefits—that is, to provide only benefits or luxuries above and beyond the benefits the beneficiary (the disabled person) receives from any local, state, federal, or private agencies.
It is extremely important that the special needs trust not duplicate any government-provided services and that the beneficiary not have any resemblance of ownership of the trust assets. Otherwise, it is very possible that the government would attempt to seize the trust assets for repayment of services provided or determine that the beneficiary does not qualify for future benefits because he/she has ample assets and income to provide for adequate care.
To make sure the beneficiary does not have any implied ownership in the trust assets, the special needs trust should give the trustee complete control over the distribution of the assets and any income they generate. The beneficiary should not be able to demand any principal or interest from the trust.
You should also instruct the trustee to purchase only goods and services that government benefits do not provide, such as airline tickets to visit relatives, furniture, a television, etc. The trustee should make the purchase directly, instead of giving the money to the beneficiary and letting him/her make the purchase.
Who Should Be Trustee?
Of course, you (and your spouse, if you are married) will continue to provide for this person while you are alive and able. But someone will need to assume this responsibility after your death or incapacity, so you will need to name a trustee.
The most obvious choice is another family member or close personal friend who has a deep concern for this person’s welfare. This may be one or more of your healthy adult children. Your attorney or CPA may also be willing to serve as trustee.
As with any trustee, be sure to discuss this with the person(s) you have in mind. Make sure they have the time, ability, and desire to take on this responsibility. Also, be aware of a possible conflict of interest, especially if your other children will inherit the trust assets after your special needs beneficiary has died. They may be more interested in preserving the trust assets than in putting the care of the special needs person first.
A corporate trustee (bank or trust company) can be a good choice, especially if you do not want to burden other family members with this responsibility or don’t want to worry about a possible conflict of interest. And, of course, you don’t have to worry about your beneficiary outliving a corporate trustee; they’ll be around to provide for your beneficiary for as long as he/she lives.
You may want to consider using both. For example, the corporate or professional trustee can manage the assets and a relative can be responsible for determining and purchasing the goods and services that will make your beneficiary more comfortable. You may also want to consider having a corporate trustee work with you now to take advantage of their investment skills and to have them become familiar with your beneficiary and his/her needs.
How Much Should You Put Into the Trust?
There is no way to know for sure how much money will be needed. Among other things, you will want to take into consideration how long you expect this person to live, the kind of care he/she will need, the benefits available (now and projected), how much income the assets can be expected to generate, how much you can afford to put into the trust, and how much you want to give to other beneficiaries. Life insurance on the life of a parent, grandparent, or other relative is often used to fund a special needs trust.
Seek Professional Assistance
As you can see, providing for someone with special needs takes more thought and is more complicated than providing for your other beneficiaries. Also, the laws vary from state to state so make sure you use a local attorney who has experience in setting up special needs trusts. Standard beneficiary wording just will not work.
Special Needs Trust for Your Spouse
If your spouse is receiving (or may need to qualify for) Medicaid benefits, you may want to set up a special needs trust to provide your spouse with some extra services and benefits that are not covered by Medicaid. It would work like a special needs trust for any other beneficiary. But, because of a recent change in the law, it would have to be set up a little differently.
For now, at least, to preserve Medicaid eligibility, a special needs trust for your spouse must be created by a will after you die. To set it up now, your attorney will write a brief will, the only purpose of which is to create this special needs trust when you die. Then you designate which assets you want to go into this trust. (Your other assets stay in your living trust.) The downside is the assets that will go into this special needs trust will probably have to go through probate. Of course, laws can change and attorneys have been working to have the wording changed so a special needs trust for your spouse can be set up through your living trust—without a special will and probate.
You only need a special needs trust if your spouse is currently eligible for or is likely to require Medicaid—and Medicaid is only available to those who have very limited assets. If you have long term care insurance or you pay for medical expenses yourself, you don’t need a special needs trust. In that case, you can provide for your surviving spouse as you wish through your living trust for the rest of his/her life.