“Special Needs Trusts”
Estate Planning for Family Members with Special Needs

This article is written to explain the importance of special needs trusts (“SNT”) and planning in order to preserve public benefits (e.g., SSI and Medi-Cal), ensure lifetime advocacy (representation) and maintain family unity in regards to the future care of a loved one with special needs after that person’s primary advocate has died. People with special needs are typically wholly dependent their entire lives on public benefits and familial support to meet their living needs. Their families continuously devote time to ensuring that their loved ones are well taken care of. But what happens when the family member responsible for care giving dies?

1. Properly done estate planning allows inheritances to supplement and not eliminate Needs-Based Government Benefits.

Any family that includes a person with special needs (e.g., developmentally or physically disabled) knows the importance of securing all available benefits for the loved one with special needs. Some of these benefits (such as Medi-Cal) are asset sensitive and prevent the person with special needs from owning more than a small amount of countable assets ($2,000 for a single person on Medi-Cal). Without government benefits the limited resources of any family will quickly be exhausted. It is important, therefore, that any inheritance intended to benefit a person with special needs not have the unintended and detrimental effect of disqualifying the beneficiary from continued government benefits. The desired estate planning goal is for any inheritance to supplement and not replace such benefits.

2. Why SNTs do not disqualify the beneficiary from needs based benefits.

There are various kinds of special needs trust (i.e., first party, third party, and pooled trusts). Here, we discuss third party SNT’s and pooled trusts. The reason that these trusts prevent disqualification is that the trust assets are not available to the person with special needs, and, therefore, do not count as available resources to disqualify the person from needs-based government benefits. How it works is that the special needs trustee has absolute discretion over whether or not to make any distribution on behalf of the beneficiary, who does not have any legal right or claim to receive any of the trust assets. Well, one might well ask why leave an inheritance to a trust that is not even legally required to benefit their loved one? Although this is counter intuitive it actually works quite well for a couple of reasons: First, the trustee cannot use the assets of the special needs trust to benefit anyone else (such as the trustee). Second, the trustee is usually another trusted family member or close family friend who cares very much about the well-being of the person with special needs (and can be replaced if necessary). Third, the trustee can only spend the assets to benefit the person with special needs (aside from paying administrative costs to run the trust).

3. How Special Needs Trusts benefit the Person with Special Needs.

Special Needs Trusts benefit the loved one with special needs by enhancing the quality of life – that is, providing the comforts not otherwise paid-for by welfare. Also, the SNT can provide an advocate to represent the beneficiary before government agencies and others. This advocate will be there when you are not there to speak for your loved-one. The SNT can purchase on behalf of the beneficiary a wide variety of personal property and services such as the following: supplementary nursing care (massages, swimming), personal care services, pay property taxes, travel, personal property, entertainment, and a home to live-in. It is important to know that SNT’s gives you the opportunity to name who steps in after you pass away.

4. Understanding the Types of Special Needs Trust for Estate Planning.

For estate planning purposes there are two types of special needs trusts one must consider: Third party SNT and Pooled SNT’s. [NOTE: First party special needs trusts are not estate planning tools but are a less attractive and more difficult to implement remedy (to avoiding ineligibility for continued benefits) where no planning has taken place.] A third party SNT is one that is drafted to provide for the administration of trust assets transferred during the settlor’s life or at the settlor’s death. Any unused funds remaining when the beneficiary dies goes to whomever the settlor (e.g., the parent) wants to have receive them (usually other family members). A pooled trust is a collective special needs trust established by a “not for profit” organization that specializes in assisting persons with disability. The pooled trust often requires that some or all of any remaining funds in the trust (at the beneficiary’s death) go to the not-for-profit organization.

5. A Letter of Instructions to Ensure Continuity in the Beneficiary’s Life.

When the primary care giver dies that person’s understanding of all the various pieces in the jig saw puzzle that makes up the disabled person’s support network disappears. If the surviving disabled person is unable to communicate what then? For this reason, it is important for the care giver to keep an up-to-date letter of instructions to the subsequent special needs trustee. These instructions tell the trustee about the beneficiary’s medical condition, health care providers, daily routines, likes and dislikes, and where the beneficiary shall reside after the care giver dies. Continuity is important.

6. Costs Associated with Special Needs Trusts.

The costs associated with a special needs trusts depend largely on the type of special needs trust and whether the trustee is paid. If a third party special needs trust is being created there are usually attorney fees to draft the trust. Then once the trust becomes operative (usually upon the death of the person who settles the trust) then there may be administrative costs consisting of fees to the trustee (if the trustee is not a family member doing this out of love) and other administrative fees payable as necessary (such as fees to tax preparers, attorneys and investment managers). If the trust is a pooled trust then there are no attorney fees to draft the special needs trust (because the pooled trust already has its own trust agreement) but there are “buy-in” fees (initial costs in order to join the plan) and there are significant recurring annual administrative costs (fees for professional investment management and day to day administration of the trust that are shared amongst all the participants). These fees are typically a percentage of the trust estate’s value (from ½% to 2%) and correspond to the level of management and administrative services provided (i.e., more services means more costs).

7. How to Choose the Right Type of Special Needs Trust.

Pooled SNT’s make sense for families with small inheritances (under $100,000) and/or families who do not have anyone to step in as special needs trustee. They are good when the pooled SNT serves persons with the particular type of disability in question and has attractive services that you wish your loved one to receive. That said, third party SNT’s make sense for families with more than $100,000 in assets, where there is real property to be kept, where there is a well suited family member to act as trustee (without pay), and where the settlor creating the trust wants any unused assets to go to other beneficiaries once the special needs trust terminates.

8. What to Do Next.

You first need to consider how much you plan to leave to your loved one with special needs, as opposed to other relatives. Treating children fairly does not mean treating them equally (which parents oft like to do). Also, you need to consider whether how much in public benefits will remain and anticipated future costs. Then, with this in mind, you may wish to consult an attorney about having your estate plan include a special needs trust and letter of instructions.

Dennis A. Fordham, Esq. is a State Bar Certified Specialist in Estate Planning, Probate & Trust Law. His Practice is located at 55 First Street, Lakeport, CA 95453 (707) 263-3235. His informative website is: www.DennisFordhamLaw.com.
Note: This article does not substitute for legal advice.

Editor’s Note: Dennis A. Fordham is an attorney licensed to practice law in California
and New York. He concentrates his practice in the areas of estate planning and aspects of elder law. His office is at 55 1st Street, Lakeport, California. He can be reached by e-mail at dennis@dennisfordhamlaw.com or by phone at 707-263-3235.

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