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Establishing & Managing a Special Needs Trust

For some families that have children with developmental disabilities, there comes a time when they need to learn about setting up a special needs trust for their child. Will it be a lot of work for whomever is handling the parent’s estate? Not necessarily, but it’s a fair question. No one has ever asked their attorney for the most complicated estate plan possible! People would like to have things as simple as can be.

When you have decided to leave an inheritance for either your child, or anyone else with a disability, there are some realities that you must consider. These realities almost always lead to the same conclusion: a special needs trust is probably the right answer. Let’s look at a number of answers to the “can’t we keep it simple?” question.

In many cases there’s going to be a trust, whether you set it up or not. If money is left outright to a person with special needs, someone is going to have to transfer that inheritance to a trust in order to allow them to continue to receive public benefits. The trust set-up after your death is called a “first-party or, “self-directed” trust, and the rules governing it will be more restrictive. There will also have to be a “pay-back” provision for state Medicaid benefits when your child dies – so you lose control over who receives the money you could have set aside. Even if no trust is set-up, there is the likelihood that your child will require the appointment of a guardian. The cost, loss of family control and interference by the legal system will consume a significant part of the inheritance you leave and frustrate those who are caring for your child. If you prepare a special needs trust now it sidesteps those limitations. The trust that you set-up should not be that complicated to manage. People often overestimate the difficulty of handling a trust. Yes, there are tax returns to file, and probably also accounting requirements. Neither of which is that complicated; neither is anywhere near as expensive as the likely costs of not creating a special needs trust. In any event, the trustee of your estate can hire experts to handle anything they find too difficult. There are lawyers, accountants care managers and even trust administrators who can handle the tough stuff. The costs of which can be paid out of the trust itself, so they will not be using their own money. True, they add a layer of expense, but they can actually help to improve the quality of life for both your trustee and child with the disability.

An immediate family member does not have to be the trustee. Many times your attorney will counsel you to name someone else. This could be a bank trust department, a trusted professional, or a different family member. If it is right for your circumstance, you might name an immediate family member as “trust protector.” That would allow them to receive accountings and follow up with the trustee, or even change trustees. Trusts are beneficial and flexible planning tools.

If your child’s condition improves, or they no longer require public benefits, the trust can accommodate those changes. Depending on your child’s actual condition and the availability of other resources, you might reasonably hope that they will not need a special needs trust – or at least might not need one for the rest of their life. Your special needs trust will be flexible enough to allow for the use of their inheritance as if there were no special needs. But, that is only true if you set up the trust terms yourself – the trust that will be created for them if you do not plan will not have that flexibility.

Simple disinheriting your child is probably not a good plan. Sometimes people express their concern about the expenses and what they perceive as complicated administrative and eligibility issues and they decide to just leave everything to their children who do not have disabilities. Their hoping that these “needs-free” children will realize the responsibility they have of taking care of that special needs sibling. True, that might work, but what about their spouse – will they feel the same way about your child? What about the grandchildren and step-grandchildren who would inherit “your” money if both your other child and their spouse were to die before your “special needs child?” What about the possibilities of divorce, or creditor’s claims against your other children, or even bankruptcy? Most people realize that disinheriting the child with a disability is not really a good planning technique.

Who in the world has a crystal ball to know what the public benefits system will be twenty years from now. Or even for that matter the medical care available, and your child’s condition. That’s exactly why the trust is so important. If you have a child, spouse, or other family member with special needs, or if you have a loved one that may have special needs in the future your plan should include an appropriate trust. I recommend that you Google the Special Needs Alliance. There’s likely someone near you who understands the importance of special needs planning.

Author’s Note: Please consult with your CFP®, CPA, Financial Advisor, and Estate/Tax/Eldercare Attorney when discussing your financial needs and developing the appropriate personal/business plan.

AT: 07/01/2014 12:53:20 PM   LINK TO THIS ARTICLE

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