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What You Need to Know About Special Needs Trusts

Parents of children with disabilities and special needs face unique challenges in providing for the day-to-day needs of their loved ones. When their thoughts turn to the issues that would arise if the parents were no longer around, the challenges become perhaps even more daunting. Consequently, estate planning for parents of special needs children requires much thought and preparation.

Essentially, there are two components to the estate planning that parents of special needs children need to cover:

1. Making sure that there would be sufficient financial assets available to provide for the necessary support and maintenance of the special needs child and any other children they may have;
2. Providing an organized structure that would be in place for the management of the assets in a way that would ensure that the beneficiaries would be taken care of, which would include:
   1. A Last Will and Testament, which includes the designation of a guardian for the child – i.e., the person who would be charged with the day-to-day care of the child;
   2. A properly structured trust, specifically designed to provide the framework for how the trust assets would be expended for the benefit of the child. (See the discussion which follows, describing how Special Needs Trusts or Supplemental Needs Trusts can be structured in such a way that the trust assets – no matter how extensive, will not disqualify the beneficiary from receiving “needs-based” benefits.)

Since I am an estate planning attorney, not a financial advisor or life insurance salesman, I will leave it up to others to provide you with advice as to how to ensure that there are sufficient financial resources. What I can offer is guidance as to how to properly create an estate plan that provides the framework for accomplishing all of your goals in making sure your special loved one is protected in the event of your death or disability.

For parents with special needs children, any good estate plan will include provisions for one or more kinds of Special Needs Trust or Supplemental Needs Trust.

The terms “Special Needs Trust” and “Supplemental Needs Trust” are often (and properly) used interchangeably. Essentially, they refer to trusts the assets of which will not be considered to be resources of the disabled person, so that such person will still be able to qualify for needs-based benefits, such as Medicaid and Supplemental Security Income (SSI). The terms of such trusts generally direct that distributions from the trust shall be made to supplement, but not supplant, any government benefits the disabled person is receiving. Such government-provided benefits are basically limited to medical costs, food and shelter. The assets in a Special Needs Trust can be used to provide for additional or supplemental support, including additional health benefits, computers and other electronic equipment, educational materials, special equipment, recreational opportunities, travel costs for vacations or other trips, gifts to family members, etc.

When speaking about Special Needs or Supplemental trusts, it is important to distinguish between “self-settled” trusts and “third party” trusts. Self-settled trusts are trusts that contain assets that once rightfully belonged to the disabled person. This may be because the disabled person was awarded money in a lawsuit or other legal proceeding, or inherited the money, or money was distributed to the disabled person from a custodial account when he or she reached the age of 21. When the disabled person’s own money is placed in a special needs/supplemental trust, there must be specific “payback” provisions in the trust that provide that, upon the disabled person’s death, any amounts paid out from government needs-based benefits (such as Medicaid or SSI) must be paid back to the government from the funds remaining in the trust.

So-called “third party” special needs/supplemental trusts are funded by someone other than the disabled person with funds that the disabled person never owned or was entitled to. With third party trusts, there need not be any “payback” provisions. Thus, all assets remaining in the trust when the disabled person dies can be distributed to other beneficiaries that the person who set up the trust wants to receive them, without any amounts being paid to the government.

This points out the reason why it is especially important that parents of special needs children have a proper estate plan. If such parents die without having made provision for a special needs trust, the inheritance the child receives will disqualify the child from government benefits. The most that could then be done would be to have a self-settled trust created. However, such a trust would have to have “payback”provisions that would ultimately deplete the trust of some or all of the assets.

That is why, in this author’s view, the first step that should be taken by parents with children with special needs is to complete their basic “foundational” estate plan. This will include wills, powers of attorney, medical directives and an appropriate trust, including special needs provisions for the disabled child. If life insurance is needed to provide a source of funds necessary to support the disabled child and any other children, then such life insurance needs to be coordinated with the estate planning documents (i.e., the trust should be made the designated beneficiary on the insurance company’s forms). A proper estate plan will give the parents the peace of mind in knowing that if something should happen to them, their special one will be taken care of. In many cases, this is all the planning these parents require. There is no need to set up separate trusts and fund them with cash or investments. After all, as long as the parents are alive and well, they know that the child will be taken care of. And, if things change in the future (i.e., changes in the law, changes in the condition of the special needs child or other family members) the parents have the comfort of knowing that all of these documents can be amended to accommodate those changes.

In some case, however, it is appropriate to establish separate irrevocable Special Needs Trusts in addition to the essential estate planning documents. Frequently, these trusts are established so that if the grandparents or other family members wish to leave some part of their estate to the special needs child, those bequests can be made to the trust instead of the child him/herself, so that the inheritance will not disqualify the child from government benefits and that there will be no “payback” required.

This article is not intended to provide a detailed explanation of all relevant elements of the various types of special needs trusts. In our view, what is important for parents of special needs children to know is that there are many planning strategies and opportunities available to them, and that it is especially important for them to do proper estate planning, utilizing the services of an experienced attorney who practices extensively in this area of the law.

If you would like additional information about your particular situation, please feel free to contact us to arrange a Complimentary Initial Consultation by calling our office at (301) 428-3911 or contacting us via e-mail at jhyatt@estateplanningmatters.com.

The tragic story of the last 15 years of Terri Schiavo’s life has certainly focused attention on the important part a “living will” and medical power of attorney can play in our clients’ estate plans. As our clients already know, we have always believed that these important documents should be a part of every estate plan. No doubt many of our clients have been comforted by knowing that, unlike Terri Schiavo, they have made arrangements for the potentially agonizing process of dealing with end-of-life medical decisions in the event that they found themselves in a similar situation. This is part of the “peace of mind” that we like to think is the ultimate service our office provides, and we take pride and pleasure in the fact that our clients assure their loved ones that they have executed these important documents.

There are three ways that our clients plan ahead to ensure that their wishes are carried out: (1) a Medical Power of Attorney designating someone to make the decision for them, based on the circumstances at the time; and (2) an Advanced Directive (“Living Will”) setting forth their own written instructions regarding the removal of life-sustaining procedures and (3) Health Insurance Portability and Accountability Act (HIPPA) Authorization to allow your designated representatives access to your medical information. While we have always maintained that the execution of these documents is essential to any estate plan, the Schiavo case points out another important lesson: Talk about this issue with your family! Sure, legal documents are fine, and they serve a useful purpose. But the Schiavo case points out the importance of communicating your desires to all of your loved ones. Perhaps the biggest tragedy of the Schiavo case was the way it irretrievably fractured her family. While the motives of her husband and her family members have been relentlessly questioned and attacked, the likely fact is that they all loved Terri, and were doing what they thought she would have wanted them to do. But, because she had not communicated her wishes to both her husband and her parents, they were left to endlessly argue. Although we will never know for sure, given Terri’s parent’s strong pro-life sentiments, it is possible, if not likely, that even if Terri had signed a Living Will directing the withdrawal of food and water, her parents would have questioned the document if she had never taken them aside and explained her feelings and desires. For this reason, we are now making it a point to urge our clients to make sure that all family members – not just the health care agent – know about their wishes. Your Advance Directive planning should be a two-step process: (1) Execute the documents; and (2) Tell everyone you love how you feel about these issues.

Not a week seems to go by when I don’t have a potential client or a telephone caller says something like: “I just need a simple will. How much do you charge?” Boy, do I find that frustrating! From my perspective, what this person is really saying, in essence is: “I don’t really care what happens to my family when I die, and there’s nothing special about them, so I want to spend as little as possible. Just give me a basic legal document that qualifies as a legal will.”

Don’t get me wrong; I certainly don’t expect anyone to spend money unnecessarily for elaborate, fancy documents that don’t serve any purpose. However, it’s not just the Rockefellers, Kennedys and Bill Gates that might want more than just a “simple” or “basic” will in order to achieve their estate planning objectives. Here are a few reasons why we don’t ever do “simple” wills:

1. People are like snowflakes – no two are alike. Many people who contact us seem to think that they only “need” a simple will, as if preparing a will consists only of filling in a one-size-fits-all form. We treat our clients as unique individuals whose families and loved ones also have their unique qualities. Our experience teaches us that by spending only a few minutes with our clients, they quickly see that their family and circumstances and their goals and objectives are not such that can be “pigeon-holed” into a form. Each will or trust we design is specifically tailored to meet the client’s objectives. Certainly, some wills and trusts are less complex than others. We always attempt to make the documents as straightforward and understandable as possible. But there are many potential inheritance pitfalls that can be avoided, and many valuable protections that can be provided by proper planning. And we believe that our clients deserve to be educated about the benefits that a more comprehensive approach can bring.
    
2. Unfortunately, the Tax Laws are not simple, so estate planning documents can’t be either. Like it or not, because the government sees death as an opportunity to collect taxes, there are state and federal estate and inheritance tax laws. By strategically navigating those laws, considerable opportunities exist for minimizing or avoiding such levies. Sometimes, so-called “simple” solutions create enormous negative tax consequences. In our view, neglecting to consider the impact of taxes on the transfer of an estate to your loved ones is irresponsible.
    
3. Simply leaving property outright to your heirs is (usually) not good planning. By definition, a so-called “simple will” is one that just leaves the person’s property outright to named beneficiaries. An alternative to an outright bequest is a bequest to a trust. A trust can be designed to provide the beneficiary with almost total control over the trust property, assuming the beneficiary is a responsible adult. Some of the benefits of a bequest being in a trust are: (1) protection of the beneficiary in the event of a divorce, lawsuit, or bankruptcy; (2) ensuring that the inheritance passes to the beneficiary’s children at the beneficiary’s death, rather than to a spouse or creditor; and (3) protecting the inheritance from the imposition of estate taxes. These advantages cannot be accomplished by a so-called “simple will.”
    
4. Estate Planning Matters! That is, it is important. And we believe it warrants spending some time and attention on it. Like everyone else, we wish our laws were simple, but the fact is that they are not. Life throws lots of things at us, and it pays to be prepared for as many of the bad things as possible. So we prefer thoroughness over simplicity. We don’t attempt to be the cheapest – we want to be the best.

By James A. Hyatt

Based on my 28 years of assisting clients with their estate planning, and cleaning up messes left behind by those who died without having properly planned for their families, I have gathered together what I consider to be the most important lessons and advice that I can share. My hope is that by sharing this essential information, more families can be spared the difficulties that can otherwise be avoided by proper planning.

Download the full booklet (PDF)

The 2001 Tax Relief Act has been a “hot topic” since it was passed over three years ago. As you may know, this legislation provides for a gradual phase-out of the federal estate tax, and elimination of the tax entirely in 2010, but has a “sunset” provision that brings the old law (with a $1,000,000 estate tax exclusion amount) back after only one year. Immediately following the passage of this law there was considerable support among Republicans in Congress to make the estate tax repeal permanent prior to 2010. The events of September 11, 2001, as well as the growing deficit problems, have pretty much dimmed any prospect for the complete repeal of the tax. It is appearing more and more likely that the estate tax will continue, although there is widespread support among both Republicans and Democrats to increase the exemption amount to at least $2,000,000. the uncertainty regarding the estate tax makes it especially important for married couples to review their existing wills and trusts to make sure that the planning is flexible enough to deal with their particular circumstances regardless of what the law is at the time when the plan will be implemented.

Governor Ehrlich has signed a bill that changes the way Maryland calculates the estate tax. Note, this bill is retroactive, in that it applies to decedents who died after December 31, 2003. Under prior law, the Maryland tax was linked (“coupled”) to the federal tax, so that if an estate was below the exemption amount for federal estate tax, there was no Maryland estate tax. That has now changed. The federal tax exemption is now $1,500,000, but the Maryland exemption is only $1,000,000. This has potentially significant consequences for many of our clients. Most of the wills and trusts we have drafted for married couples over the past 10-15 years have “formula language” that reduces the federal estate tax to zero. Under the new law, such formula language may result in a Maryland estate tax of up to $64,000 at the death of the first spouse, where none existed before. For this reason, virtually all of our married clients should come in for an Estate Plan Review in order to determine if a change in their documents would be in order. For many of those clients, a slight “tweaking” of the language in their documents may be all that is required to save over $64,000 in potential taxes.

If you’ve been to a doctor’s office or hospital lately, the chances are good you have seen the effect of the Health Insurance Portability and Accountability Act, commonly referred to as “HIPAA.” This law was actually passed in 1996, but in September, the regulations interpreting the Act were issued. The net effect of these regulations is to make the medical community paranoid about being sued for releasing medical information to anyone. Thus, it has become increasingly difficult to get doctors and hospital staff to deal with the families of patients when such communication is critical. In response to these new regulations, we have made some significant changes in our health care documents, which we believe will alleviate the problems that might otherwise be encountered if and when our clients need to use the health care power of attorney.