Estate planning vehicles created with disabled heirs in mind.
Provided by Brian Damiani
If you have a child with special needs, you face long-run financial demands that cannot be fully met through federal and state assistance. What can you do to try and meet them?
A special needs trust may provide an answer to this dilemma. This is a trust designed to provide for assorted care and lifestyle needs not covered by public benefits – medical and dental needs, transportation needs, therapy and more. A trustee uses such a trust to make purchases of goods and services on behalf of a “permanently and totally disabled” person (as defined by the federal government’s Supplemental Social Income standards). In addition, a properly implemented special needs trust lets a disabled heir receive assets without the inherited funds reducing their chances of securing Medicaid, SSI or state benefits.1,2
There are two kinds of special needs trusts, defined by who funds them. A third-party special needs trust is funded by someone other than the beneficiary. Should the beneficiary of the trust die before the trust assets are exhausted, the remaining assets may be distributed to secondary beneficiaries. Third-party special needs trusts can be either living trusts (i.e., created during a grantor’s lifetime) or testamentary trusts established by a will.2
A first-person (or “self-settled”) special needs trust is funded by the beneficiary, often by assets received from a personal injury lawsuit or legal settlement. You have probably heard stories of lump sum cash settlements quickly evaporating; this trust is designed to guard against that. A trustee can oversee the distribution of the assets with an eye toward conserving them. The beneficiary maintains eligibility for public benefits. When the beneficiary of a first-person special needs trust dies, assets remaining in the trust go to the state to repay Medicaid benefits conferred to the disabled person during his or her life. Any assets left over after that may be distributed to secondary beneficiaries.1,2
In either special needs trust variation, a beneficiary cannot withdraw funds from the trust or directly receive distributions from it (distributions are overseen by the trustee). The beneficiary is also legally prohibited from revoking the trust.2
Informal arrangements have their drawbacks. It is still common for a sister or brother of a newly disabled person to hold assets that once belonged to that sibling. Too often, these assets became “easy pickings” in a bankruptcy or divorce. A special needs trust protects such assets from litigation and creditors.1
Standard estate planning efforts may fall short. Some families set up basic life insurance trusts for disabled heirs, but these trusts are often flawed. The trust language fails to specify that the life insurance proceeds should head directly into a special needs trust. If that next step never occurs, the beneficiary of the life insurance trust loses eligibility for Medicaid due to inheriting that large, tax-free insurance benefit.1
Anyone with more than $2,000 of countable assets ($3,000 for a married couple) loses Medicaid and SSI eligibility. So if you want to bequeath or gift assets to the beneficiary of a special needs trust, you have to name the special needs trust as the heir or beneficiary of those assets, rather than the individual named as beneficiary of the trust.1,3
How do these trusts function? The core principle is that the trust assets supplement government benefits, so they work according to a sliding needs scale; for example, should public benefits somehow be able to provide for 100% of the beneficiary’s needs, the trust will provide 0% and vice versa. Trust assets may be invested conservatively, with the resulting income stream paying expenses for the beneficiary.4
The trust language must express a goal to provide “supplemental and extra care” to the trust beneficiary in addition to public benefits (as opposed to basic financial support). The trust must also be without a Crummey clause (a proviso allowing future interest gifts to be treated as present interest gifts, thereby making them eligible for the annual gift tax exclusion).4
ABLE accounts are also emerging. The federal government has authorized a new tax-favored account to benefit disabled individuals, on track to appear in 2016. Distributions from an ABLE account will be tax-free if they are used to cover qualified disability expenses; individuals will be able to contribute up to $14,000 a year to these accounts. Even with this tax break, families may prefer the special needs trust as it has no limits on contributions and permits funds to be spent on a wider range of expenditures.5
The bottom line: if you wish for your loved one to have a good quality of life for years to come, a special needs trust may prove instrumental in allowing you to provide it.
Brian Damiani may be reached at (925) 462-6007 or associates(at) wealth-mgt.bet
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – tinyurl.com/meqw7va [4/8/15]
2 – getevolved.com/trust-fiduciary/special-needs-trusts [5/14/15]
3 – pacer.org/publications/possibilities/saving-for-your-childs-future-needs-part1.html [5/14/15]
4 – nsnn.com/frequently.htm [5/14/15]
5 – tinyurl.com/mbufwvy [2/2/15]