Do you have a child that has a serious physical or mental disability? Have you as an adult inherited money or received a settlement from a car accident? Are you concerned that you as an adult or your child may need a lifetime of financial and personal care? Are you concerned that you as an adult or your child may need public benefits and you want to make sure any money you acquire does not interfere with those benefits? Do you ask yourself “Who will care for my child when we are gone?” or “I don’t want to lose my government benefits if I get a settlement or inheritance” We at East Bay Probate and Trust Administration can help you.
A special needs trust provides parents and disabled adults with peace of mind that their child or themselves, whether a minor or an adult, will continue to be eligible to receive government benefits for medical care, housing, food, employment and vocational rehabilitation services yet have money for “extras” not covered by government programs such as companionship, travel, hobbies and entertainment.
There are two types of special needs trusts. The first is called a First Party Special Needs Trust. It is set up with money from the person with the disability (often times money received from inheritance/lawsuit). These types of trusts used to require that the trust be established by someone other than the person with the disability (like a parent/grandparent/court order). However, new law allows for the disabled adult to set up his own First Party Special Needs Trust.
The second type of special needs trust is called a Third Party Special Needs Trust. This type of Special Needs Trust (SNT) is a trust that we at East Bay Probate also set up for our clients. A Third Party SNT is set up with money from persons other than the special needs person, like a parent or grandparent. These trusts can be part of the parent/grandparent’s revocable living trust or they can be a standalone (inter vivos) trust independent of anyone’s revocable living trust.
Most parents’ primary concern is that any monies they leave to their special needs child or adult do not interfere with public benefits. Special needs adults want to make sure that money left to them through inheritance or received through a settlement/lawsuit does not interfere with their public benefits. Public benefits are divided into two main categories: needs based benefits such as SSI and Medi-Cal (where a SNT necessary) and entitlement based benefits like SSDI and Medicare (where a SNT not necessary). Needs based public benefits like SSI and Medi-Cal require the beneficiary to have limited income and only $2,000 in his/her name. Luckily, assets in a Special Needs Trust are not counted for eligibility to SSI or Medi-Cal.
Let’s go into a bit more detail on Third Party Special Needs Trusts. First, this type of SNT is established with the assets of someone other than the beneficiary (usually a parent/grandparent). The main purpose of this SNT is to supplement needs-based public benefits without supplanting them. In this way, the beneficiary can receive and hold the assets without losing public benefits. However, most importantly, the beneficiary cannot control the amount or frequency of trust distribution. One of the main concerns our clients have is that they want to preserve public benefits for their child and they want to ensure that their child will not be unnecessarily institutionalized, will be properly educated, and will achieve his/her full potential. We at East Bay Probate work with our clients to create a long-term management team that protects the beneficiary from undue influence and exploitation.
However, for a SNT to work properly, there are very strict rules that must be followed. First, the trustee can’t provide food and shelter/rent because Medi-Cal/SSI will consider this “in-kind support and maintenance” and will reduce or eliminate your child’s benefits. The trustee can’t use the SNT to pay for medical expenses if those medical expenses are already provided by Medi-Cal. However, the SNT can be used to provide for clothing, as long as payment is made directly for items or services. The SNT can be used to pay for dental care, custodial care, and support services that public benefits programs do not provide. It can also be used for telephone, internet, television, hair and nails, laundry, furniture, computers, vehicles and services for said vehicles, newer medications that Medi-Cal doesn’t provide, massage therapy, etc. However, the trustee must not give the beneficiary money to pay for these services but must make payment directly to the provider. Also, you can’t reimburse beneficiary for purchases beneficiary makes and you can’t distribute money directly to the beneficiary.
SSI has 2 requirements for a Third Party Special Needs Trust. First, the beneficiary cannot revoke the SNT and secondly, the beneficiary cannot direct the use of the trust assets. When a parent or grandparent creates an estate plan with a Revocable Living Trust (RLT) or Will, a SNT can be created within the RLT or Will, with the SNT coming into existence when the settlor(s) dies. However, we can help you create an inter vivos Third Party Special Needs Trust that comes into existence before you die. This can be more time consuming and costly but helpful if others want to contribute to the SNT (like other family members who can leave bequests to the inter vivos SNT). When we create an inter vivos SNT for our clients (a SNT that is to receive money from different sources), we oftentimes create an irrevocable trust because donors feel more comfortable transferring assets that will not be modified later.
The tasks for a trustee of a SNT can be daunting. The trustee needs to oversee the beneficiary’s care to 1) determine which services are available 2) ensure the beneficiary receives the highest standard of care 3) visit the beneficiary to inspect living conditions 4) consult with medical professionals 5) ensure all public benefits are received 6) and apply for therapeutic, educational, and employment training programs for beneficiary. The trustee can be A) a hired professional B) a family member or C) a friend. You can also, with our help, create a Trust Advisory Committee made up of friends and family who can watch over the trustee or assist the trustee. You can, with our help, put in place a Trust Protector to 1) protect against a poorly performing trustee and 2) to modify the SNT to address changes in the law or in the beneficiary’s circumstances.
Another challenge facing our clients is how much money to place in the SNT. Total life circumstances must be evaluated such as the life expectancy of beneficiary, the availability of other private support (life insurance/grandparents, etc.), and the estimate future cost needs of person with disability. Financial planning calculators such as MetLife’s Met Desk Special Needs Planning Calculator or the Merrily Lynch Special Needs Calculator can help with this process. Parents need to look at best case and worse case scenarios and review of government benefits and their availability. This is challenging and at times is more art than science.
We work with our clients to determine the demands placed on their estate: taking a good hard look at their own retirement needs as well as what to leave to other children. Do they want to consider leaving more to the special needs child and less to their other children? We work with our clients to estimate a sustainable distribution rate of the trust to the beneficiary and consider whether or not to fund the SNT with a life insurance policy payable after both parents have died. Other concerns that we work with are gift tax issues; if its revocable SNT, the money given to the trust is not a gift because the grantor can take money back anytime however, if it is an irrevocable trust, then giving money to trust may be a gift and might be taxed to the grantor.
A SNT trustee must have clear understanding of how SNT distributions interact with public benefits. A SNT trustee may be required to ensure that the beneficiary is receiving all the public benefits to which he/she is entitled. A SNT trustee may need to take care of the beneficiary’s personal needs (but may also have to consider the interests of the other heirs and remainder beneficiaries). A SNT trustee should become familiar with community support organizations. A SNT trustee can delegate some, but not all of his/her duties and must evaluate what needs to be done to enrich the life of the beneficiary.
Effective planning requires understanding of different areas of law (estate and tax planning, public benefits, family laws, incapacity). Drafting a SNT is only the first hurdle our clients must face. We work with the proposed trustee (or successor trustees) to educate them about the multiple tasks they must consider and the circumstances they must evaluate to be an effective trustee to ensure that special needs beneficiary’s life is as full and wonderful as can be.