If you have a special needs child, you’re probably very concerned about the level of care your child will receive after you’re gone. After all, you want your child to thrive and have access to the best care possible, but when you’re gone, how can you ensure that your child’s needs will be met? A Special Needs Trust might be a good fit within your overall estate plan, depending on your family’s particular circumstances and your wishes for passing along your legacy. This article, presented by estate planning attorney Steven C. Holman, provides some basic information about Special Needs Trusts and how they may fit into your Texas estate plan.
What Is A Special Needs Trust?
A Special Needs Trust (SNT), also sometimes called a Supplemental Needs Trust, is an estate planning tool used to provide for a child with special needs. This type of trust is created to hold assets that will be used to provide for the future needs of the child. Based on how the trust is drafted, it can protect the child’s eligibility to receive public benefits, such as Medicaid or Supplemental Security Income.
As in other types of trusts, a Special Needs Trust is structured around the following three roles:
1. Grantor – the person who creates the trust and funds it.
2. Beneficiary – the child with special needs, for whose benefit the trust is established.
3. Trustee – the person who manages the money held in the trust, for the sole benefit of the beneficiary.
Direct Inheritance Versus SNT
Public benefits such as Medicaid have strict eligibility requirements based on resources and income. Leaving a direct inheritance from your estate to a child with special needs could disqualify him or her from receiving much needed public benefits that would pay for medical care during their lifetime. A Special Needs Trust can solve this problem since the trust assets are not considered for eligibility of public benefits, and your beneficiary can still take advantage of additional assets to improve his or her quality of life.
There are three main types of Special Needs Trusts.
First Party – A first party special needs trust is a trust that is funded with assets already belonging to the beneficiary, such as a direct inheritance or an insurance settlement. First party Special Needs Trusts have a Medicaid payback provision, which means that if funds remain in the trust after the beneficiary’s death, Medicaid will make a claim for reimbursement of medical benefits previously paid out on the beneficiary’s behalf.
Third Party – This type of SNT, is created by a grantor on behalf of the beneficiary, often to supplement the beneficiary’s public benefits. Typically, a relative such as a parent or grandparent, establishes this type of SNT, which allows other family members to contribute to it. The grantor controls where the money goes if the beneficiary dies before the trust assets are utilized or depleted, as there is no Medicaid payback provision with this type of SNT. The trust can be funded during the grantor’s lifetime (inter vivos), also allowing other family members and friends to contribute. Alternatively, the SNT can be set up as a testamentary trust, taking effect upon the grantor’s death, when the estate is settled as set forth in the Last Will And Testament.
Pooled – A pooled Special Needs Trust is managed by a non-profit organization instead of a single trustee. Pooled Special Needs Trusts are typically utilized when a beneficiary has a small inheritance and doesn’t need a full-blown SNT. A pooled SNT can also be used if there are no viable options for someone to serve as trustee. This type of SNT allows beneficiaries to pool their trust assets for investment purposes.
As with other estate planning tools, Special Needs Trusts can have disadvantages depending on your circumstances and needs.
Strict Regulations – There are strict rules and regulations in effect to prevent the misuse of SNTs. One such rule is that trust money cannot duplicate the public benefits the beneficiary receives. Trustees are responsible for ensuring all trust distributions are compliant, the trust’s funds are invested appropriately, bookkeeping, and tax reporting.
Costs – Expensive annual fees and the initial costs to set up a Special Needs Trust could make it financially difficult. The administrative costs of managing the trust year after year can deplete a portion of the trust’s assets.
Medicaid Payback – As mentioned earlier in the article, First Party SNTs are subject to Medicaid payback claims if the beneficiary passes away with funds remaining in the trust.
Why Should I Consider a Contingent SNT in my Own Estate Plan?
A Contingent SNT can be included in your own will or trust even if you don’t have any beneficiaries who might currently need an SNT. In some cases a beneficiary who isn’t even born yet, like a grandchild or great-grandchild may have special needs and qualify for certain public benefits. In other cases, an otherwise healthy beneficiary today, may need public benefits later in life. These are examples of situations in which the executor or trustee would have the option to distribute assets to a beneficiary in a Special Needs Trust, if that beneficiary’s circumstances needed it to prevent the loss of public benefits. This option would cover all the potential beneficiaries in your estate plan and could be a useful tool if the unexpected should arise.
Do You Need An Attorney’s Help?
If you think a Special Needs Trust is right for you and your family’s needs, you should speak with an experienced Texas estate planning attorney who can help you assess if it’s the best legal tool for your particular situation and wishes. Additionally, it’s important to follow federal and state laws that govern the creation, funding, use and termination of Special Needs Trusts. An estate planning attorney can also help ensure your trust’s legality, as it must contain certain language required by the state, and be broad enough to meet the evolving needs of the beneficiary as he or she ages.
The estate planning firm of Holman Law LLP is located in North Dallas, TX and represents clients across the State of Texas. If you’re interested in speaking with us about your estate planning needs, please do not hesitate to contact us. We can be reached by phone at (972) 474-7828 or via our website. We look forward to speaking with you.