a summary of considerations in estate planning for parents of special needs children.
Special care must be given to planning for a special needs child. "Special Needs", for our purposes, means a child (whether a minor child or grandchild) who at birth or subsequently thereafter is mentally, physically, emotionally or developmentally impaired or disabled to such degree as would enable the child to be eligible, or potentially eligible, for means-tested public or governmental benefits.
4 Options for the parent.
(1) Effectively disinherit the child, and allow the child to rely solely on public benefits. This is not as harsh as it may sound in that if the parent's wealth is modest, the child's needs great, and there are other children to provide for, this may be a reasonable approach. The danger here is that there is no "safety net" for the future. (2) Make an outright gift/bequest to child. This may be sufficient if the disability is not significant, the need for public benefits is small, the parent has a small estate, and there are no other Heirs (spouse or children) to provide for. The downside of course is that any such gift or inheritance could negatively impact any public benefits the child is currently receiving, or potentially make the child ineligible for some period of time for such benefits if public benefits were needed in the future. (3) Distribution to a sibling for the benefit of the child. The risk here is the child to whom the money is given could spend it, misappropriate it, poorly invest it, or lose it to his or her own creditors. (4) Special Needs Trust (SNT). A SNT is most often the best option. The primary purpose of a SNT is to qualify the child for public assistance and means-tested programs, and provide discretionary and supplemental benefits to enhance the child's lifestyle. SNTs may be created in life or at death by a third party for the disabled or special needs individual, or may be "self settled" trusts if created with the funds of the disabled or special needs person.
Two basic types of SNTs (Special Needs Trusts)
There are two types of SNTs. A "Third Party" Trust, and a "Self Settled" Trust. A self-settled trust is established with the assets of a person with a disability. It is generally established by the parent or guardian, the disabled person, or under the direction and authority of a court, often in conjunction with the settlement of a lawsuit. Third party trusts require no enabling federal legislation, as they are trusts created for a disabled or special needs beneficiary with the funds of another party by way of a gratuitous transfer made in life or at death of the donor.
Limitations on creation of Self Settled SNTs
Federal law provides special authority for self-settled SNTs, set forth at 42 U.S.C. ?1396p(d)(4)(A) ["payback trusts"] and (d)(4)(c) ["pooled trusts"], and at 42 U.S.C. ?1382b(e)(5). Most self-settled trusts are referred to as (d)(4)(A) trusts. The trust must only benefit the disabled person, must be irrevocable, must be for a person under 65, and upon their death, the assets remaining in the trust must first be used to repay any state Medicaid agency which provided benefits to the disabled person. In addition, even upon the creation of such a trust, any existing Medicaid liens must be dealt with.
Why "Third Party" trusts are more beneficial for the disabled individual.
Unlike a self settled trust, there is no concern with existing Medicaid claims, there are no age limits and no pay-back provisions to state agencies. Such a trust will not count against the beneficiary who will then be available to receive means tested public support, with the trust funds utilized for educational and discretionary support and lifestyle improvement. However, like a self settled trust, income should not be paid directly to the beneficiary as doing so may reduce or eliminate the public benefits the beneficiary could otherwise be eligible to receive.
Important Drafting considerations for Third Party SNTs
* It is imperative that a third party SNT be properly drafted to be purely discretionary, supplemental and NOT provide Medicaid pay-back provisions! * It is equally important that upon the death of the beneficiary, the assets are distributed to persons determined by the donor of the trust. At most, the beneficiary may have a limited power of appointment to appoint the residue at his or her death under his or her Will to others, but not his or her estate or creditors; otherwise, Medicaid could make recovery against it, defeating the purpose of having established the third party trust.
Comparison between a Third Party SNT and a 'regular' trust.
The key behind a SNT is that the assets are not "available" to the disabled or special needs beneficiary, thus qualifying the person for public benefit programs. This is why the drafting of a SNT must be handled carefully, to avoid the trust being able to make significant distributions directly to the beneficiary, or otherwise having the trust treated as a general support trust. For example, a trust that provides the funds can be used for the health, maintenance, support and education of a beneficiary is generally a support trust if not otherwise limited. This standard is an "ascertainable" (or determinable) standard, on which distributions may be compelled to meet the standard. As such, the assets are "available" to the beneficiary and will jeopardize public benefits if not limited and carefully drafted. Even a "purely discretionary" trust, in which the trustee has sole and absolute discretion regarding payments to or for the disabled or special needs beneficiary, or even a "discretionary support trust", can cause problems, as some state courts have held that the exercise of such discretion is rarely absolute and must be exercised in a reasonable manner, otherwise the purposes of the trust may be thwarted. Due to this, it is essential, if it is your intent to create a third party SNT, that you have the trust document or your Will professionally drafted by a competent estate planning attorney familiar with the issues. What if the proposed beneficiary is not currently receiving means-tested benefits such as SSI or Medicaid? A SNT may still be the best choice, especially if these benefits are contemplated as being needed later in life. In addition, a third party SNT will serve to protect the disabled or special needs child from his or her inabilities, disabilities, creditors and predators.
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