Special Needs Planning: What is a Special Needs Trust?
What is a Special Needs Trust?
As the parent of a child with special needs, it has been our experience that you will do whatever is necessary to care for your child. As unnerving as it may be to think, what happens when you are no longer able to provide for your child? At your death, how do you continue to provide the same level of care that will allow your son or daughter to continue to live as fulfilling of a life as possible?
The Special Needs Trust (SNT) is arguably the most important planning tool available to families with children with special needs. Although many of the families we serve each year come into our office having heard of special needs trusts, they are often unaware of what these trusts really accomplish, more importantly, what they protect.
Before I get into this topic, know that I am not an attorney and I am not compensated for drafting special needs trusts. Our expertise is purely driven from the interaction with hundreds of special needs families each year and from our ongoing work with attorney’s to help these families prepare their plans. You should always consult with an attorney to have your legal documents drafted and you should consult specifically with an attorney that has experience in drafting special needs trusts.
We’ll discuss what a special needs trust is specifically, but let’s briefly discuss what a trust is without the legal jargon. As simple a definition of a trust as I’ve found is: a trust is a legal device used to set aside money or property of one person for the benefit of one or more persons or organizations (as defined at http://www.mscf.org/). In other words, a trust is simply a legal document that is drafted to own and ultimately distribute assets from one entity to another. Think of it as an empty box that can hold ownership of most assets (including investments like stocks and bonds, cash, real estate, insurance or collectibles) that when properly drafted allows the grantor (person setting up the trust) to circumvent probate and have their assets distributed as they would intend.
Trusts can be used for various reasons such as to aid in tax savings, divide a family’s estate among children, carry out a charitable plan, or in this case, provide support for an individual with special needs. SNT’s can be created in various forms, but often they are implemented as a tool for parents to leave assets at their death that will be used to provide ongoing support for their child with special needs.
A SNT is a tool used to hold assets for the purpose of supplementing governmental benefits for an individual with special needs. The key is that these trusts supplement yet do not supplant benefits provided through social security and the state. Currently, federal guidelines dictate that an individual with special needs over the age of 18 has to follow strict asset guidelines in order to qualify and maintain these vital benefits. To remain eligible for social security income (key: SSI, not SSDI) the individual cannot maintain assets in excess of $2,000. Note: $2,000 is the federal guideline, but states can take a more stringent stance – Missouri for example sets the guideline at just $1,000. Understanding this stringent limitation is placed on individuals in regards to the amount of assets they can own leaves families with the burden of finding a way to leave behind funds to supplement their child’s future needs without making them ineligible for benefits.
In preparing their estate plan, your neighbor quite likely can simply leave assets divided among their children or beneficiaries directly without a limitation on how much they can leave them. This is also true for your non-disabled children (although trusts can be very beneficial when leaving assets to any child or charity). But, for your son or daughter with special needs, you simply cannot leave money directly to them at your death without the reasonable expectation that they will become ineligible for benefits, at least temporarily. At a minimum your son or daughter could be forced to spend down the assets received below the $2,000 threshold and then reapply for benefits once they have done so. In some cases ‘after the fact’ trusts can be developed, but they will likely require a Medicaid payback clause.
Let’s assume an example where a disabled individual over the age of 18 is receiving the full social security monthly cash benefit amount. Further, let’s assume they live in some form of an independent living residence. In most states, the individual is entitled to approximately $675 per month. This income is meant to provide food and shelter and would likely be recouped by any living facility your child may choose to live in during adulthood. Of this monthly cash benefit, the individual is typically entitled to keep a small stipend for additional expenses (often times this is around only $30!). Now think of all the ‘things’ your son or daughter needs and enjoys each month that are necessary to provide a minimum level of comfort and a certain quality of life: CD’s and DVD’s, computer games, going to the movies or out to eat with friends, vacations with siblings, etc. Don’t forget even more essential needs such as asthma medication and toiletries. This is what a special needs trust accomplishes: it allows monies to be set aside specifically to provide these supplemental resources, while not disrupting the critical state benefits your child may well be dependent on. No parent can expect the quality of life they would wish for their son or daughter in perpetuity with a budget of $30/month.
We didn’t even discuss the most important benefit of social security and state benefits in most cases – medical coverage. To some, the monthly SSI income discussed above is critical, while to others it is not overly significant. As many of our families have unfortunately experienced, medical coverage can be critical to any family regardless of their financial resources. This further confirms the importance of leaving assets behind in a special needs trust as opposed to leaving it directly to the individual as this may cause not only a loss of the monthly cash benefit, but, more importantly, a loss of vital medical benefits.
Whether your child is over the age of 18 and already receiving state provided benefits, or your child is under the age of 18 and may someday be dependent on these benefits, a special needs trust is the core of a comprehensive plan to ensure quality of care for your child. Critical state benefits such as social security and Medicaid will provide a base of care for your loved one, but a family can help supplement the individual’s needs by using a special needs trust.
- “Instruction Manual” for Your Child with Special Needs
- Guardianship: A Basic Understanding for Parents
- Handling Your Child’s Diagnosis: Six Things Parents Should Do For Themselves
- A Special Need Planning Timeline: 9 Steps to a Sound Family Plan
- Plan Early for Your Child’s Long-Term Security
- Able Account or Special Needs Trust: How to Decide?
- Creating a Financial Game Plan | A Milestone-Based Guide to a Special Needs Plan
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