Estate Planning for Parents – Part II

August 8th, 2012 | written by Nancy Larson

Estate Planning for Parents of Persons

With Developmental and Other Severe Chronic Disabilities

Part II

No one cares more about the future of a disabled child than parents.  If a person with a disability will likely have long-term medical and support needs, parents should consider setting up a Special Needs Trust, also referred to as a SNT.

It is never too early to put plans in place for contingencies such as a parent’s disability or sudden death.  A Special Needs Trust (SNT) is a specific trust that is set up with the purpose of preserving a disabled person’s eligibility for needs-based government benefits while providing assets that may be used to supplement public benefits in order to improve the disabled person’s quality of life.  There are several kinds of special needs trusts, namely self-settled SNTs and third-party SNTs.

The laws governing trusts are complex and subject to changes.  Tight state budgets have not been kind to the disabled:  setting up a special needs trust requires an attorney who is knowledgeable in special needs planning who can draft a will and necessary trust documents.

Types of Special Needs Trusts

Self-settled SNTs are established with the assets of the disabled person from the proceeds of a personal injury award or other court action, or from inheritances or gifts received before the creation of the trust.  A self-settled SNT must be established by a parent, grandparent, guardian, or a court.

The disabled person must be the sole beneficiary of a self-settled SNT.  No remainder beneficiaries may be named in the trust instrument.  A self-settled SNT is irrevocable, and must be set up during the person’s life, and can be established only if the beneficiary is under age 65.

At death, anything left in the trust is paid back to the state to “pay back” the Medicaid lien.

Another kind of SNT is a third-party SNT which is established with assets owned by a third party for the benefit of the disabled person.  This kind of trust is usually established and funded by the parents, relatives, or friends of the disabled adult child as part of an estate or gifting plan.

Other family member’s children can be named as remainder beneficiaries after the death of the disabled person.  There is no age limit for a disabled beneficiary, and there is no requirement that any remaining funds at death be “paid back” to the Medicaid lien.

The Golden Rule

The golden rule in special needs planning:  the trustee should make payments on behalf of the beneficiary directly to third-party vendors for equipment or services which are not food or shelter.  For example, distributions directly to a retailer for a radio or television, to an airline for a plane ticket, or to a companion/aide for services rendered are not income to the beneficiary.

Example #1:  Distributions from a SNT directly to an SSI beneficiary

Paul is the trustee of a special needs trust established by his deceased father, Bill, for the benefit of Bill’s disabled daughter and Paul’s sister, Jean.  Jean’s living expenses, including rent, food, transportation and clothing, total approximately $2,000 per month.  Paul sends Jean a check on the first of every month for $2,000 so Jean can pay her expenses.  Since Jean is receiving cash income in excess of her monthly SSI benefits, she loses her SSI.  She also loses her Medicaid benefits that pay for costly prescriptions and medical care.

Example #2:  Distributions from a SNT to third-party vendors for food or shelter

May is the trustee of a special needs trust established by Betty under her Last Will and Testament for her adult disabled adult, Karen.  Karen receives SSI, Medicaid, and food stamps.  Karen lives in an apartment.  May signed the lease as trustee of the SNT and pays all rent directly to the landlord.  The rental payments will result in a reduction, but not the elimination, of Karen’s SSI benefits.

Example #3:  Distributions from a SNT to third-party vendors for items that are NOT food or shelter

JoAnn, a disabled adult, receives SSI.  Deb is the trustee of a special needs trust established by JoAnn’s parents for her benefit.  JoAnn likes to read the Belleville News Democrat.  Deb arranges for the delivery of the BND newspaper to JoAnn on a daily basis and pays the bill directly to the Belleville News Democrat.  This is not considered income, and will not affect JoAnn’s SSI benefits.

There are many follow-up steps to make sure a special needs trust works on behalf of a loved one. Be sure to consult with an attorney interested in special needs issues, as well as estate planning, to put your disabled or special needs family member in the best situations possible.  A knowledgeable attorney will help determine the best course of planning for a lifetime of quality of care.

(Submitted to BND Adult Lifestyle:  5/23/12)