Estate Planning: A Special Trust for a Special Need (Part 1)

by | Jun 22, 2022 | WWC WorthWhile Reading


Many parents with a disabled child worry about how care, support and financial needs for their child will be met when they are no longer alive. Often leaving money directly to their children jeopardizes their ability to receive any help from means-tested government programs like Social Security’s Supplemental Security Income and Medicaid. Typically, beneficiaries of either program can only have, at most, assets of a few thousand dollars, with the specific amount varying by state. Without enough assets and/or help from government programs, this may leave the child without adequate financial support.


One option to help with this conundrum is to set up a special needs trust. The trust will provide for the child when caregivers are no longer around to take care of them. Because the SNT owns the assets instead of the child, they are excluded from asset limit tests for SSI or Medicaid. Meanwhile, the trust can help fund quality-of-life improvements for the beneficiary, such as a phone, a trip or a private room in a group care facility. Medicaid typically only pays for a semiprivate room. The SNT is also a way to ensure that a vulnerable family member gets the money and that other relatives, such as the siblings of the disabled person, aren’t left with the responsibility and cost of that care.


What Counts as a Special Need


A special needs trust can only be established for someone younger than age 65 and is meant for an individual with a physical or mental disability so severe that the person cannot work and needs ongoing support from Medicaid and Social Security. A disabled person who can still work could earn too much to receive government support, negating the need for this type of trust.


There are no national standard for regulating SNTs and every state has different guidelines for who can use one, with some requiring that a medical professional verify the trust beneficiary’s disability.
It’s also not always possible to predict the severity of the disability over time. And if the beneficiary ends up not needing the special needs trust, it would still operate as an ordinary trust and give the beneficiary the income according to your instructions, but you may be paying for a more expensive trust than you need.


Financial and Legal Details


An SNT can be more costly for an attorney to set up vs. a simple trust. Plus, a trustee will need to be appointed to administer the trust. A family member can fill that role but not the special needs beneficiary.
Because every state has its own system for administering disability benefits, particularly for Medicaid, the trusts must also be tailored to match those rules. In fact, the SNT will need to be reported to the state. For instance, a trust beneficiary who applies for government benefits like Medicaid or Social Security’s SSI will need to disclose the SNT’s existence, but the person’s ability to receive benefits won’t be affected.


If a special needs trust beneficiary moves to a different state, the SNT may be subjected to two different sets of laws, and the trustee will want to confirm that the trust meets the new state’s requirements. Most trusts are drafted to be controlled by the law of the state where they were created, says Graves. “The most likely outcome is that the administration of the trust would be governed by the state of origin, while the impact on the benefits would be governed by the state where the beneficiary is applying for benefits.”


Once the trust is set up, the ongoing costs are reasonable. A bank or a trust management company acting as the trustee usually charges 1% to 2% of the trust’s assets each year in fees. There may also be accounting fees if a professional, rather than the trustee, prepares the trust’s annual tax return.








This commentary was originally posted by David Rodeck June 8, 2022
Source: Estate Planning: A Special Trust for a Special Need | Kiplinger








**Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.