If you have a child or other relative with special needs, you may have been advised not to give them or leave them money outright. The two main reasons are likely to be 1) that the person cannot manage money well and 2) that they will lose their government benefits if they own assets or receive income above certain thresholds. But what alternatives do you have? You may have heard that you should disinherit your special needs child to protect their public benefits. But these benefits rarely provide more than basic needs. And this solution (which normally involves leaving the inheritance to another sibling) does not allow you to help your special needs beneficiary after the sibling becomes incapacitated or dies. A better solution is to create a special needs trust to hold the inheritance of a special needs beneficiary. We have previously posted about planning for special needs persons generally. This post focuses on utilizing a third-party supplemental needs trust for a person with special needs.
A third-party supplemental needs trust is a trust that is created by one person for the benefit of another person with special needs. For example, a grandparent may create a supplemental needs trust for their disabled grandchild. These trusts are also sometimes referred to as special needs trust (or “SNT”). A properly drafted supplemental needs trust will protect the means-tested public benefits a disabled beneficiary may be receiving, and it can provide for proper care of that individual throughout their lifetime.
This type of trust can be created and funded during your life, or as part of your estate plan. Many people with special needs children create the supplemental needs trust as part of their own revocable living trust or will. This means that instead of the child’s share of inheritance going to them directly, upon your death the supplemental needs trust is there to receive the child’s share instead. A trusted person or institution is nominated to serve as trustee of the trust. The trustee administers the trust and is in charge of making distributions to the beneficiary or on the beneficiary’s behalf.
So what do we mean by supplemental needs? These needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (for example, a specially equipped van), training and education, insurance, transportation and essential dietary needs. If the trust is sufficiently funded, the disabled person also can receive funds to be used for quality-of-life-enhancing expenses: the types of benefits families currently provide to their child or other special needs beneficiary. However, the rules often change on the types of expenses that can be paid for by a special needs trust. Therefore it is important to seek advice when drafting a supplemental needs trust, and it is also important for a trustee to continually seek advice when administering a special needs trust.
A wonderful benefit of using a third-party supplemental needs trust is that you can decide when you create the trust, where any remaining funds go after the beneficiary passes on. This is not the case with first-party special needs trusts.
A key benefit of creating a special needs trust now is that the beneficiary’s extended family and friends can make gifts to the trust or remember the trust as part of their own estate plans. For example, these family members and friends can name the special needs trust as the beneficiary of their own assets in their revocable trust or will, and they can also name the special needs trust as a beneficiary of life insurance or retirement benefits.
Planning that is not designed with the beneficiary’s special needs in mind may render the beneficiary ineligible for essential government benefits. Yet, disinheriting a special needs person is not necessary. A properly designed special needs trust can promote the comfort and happiness of the special needs beneficiary without sacrificing eligibility for their government benefits.