If someone with special needs
depends on you for financial resources, your estate plan should address how
that support will continue when you're no longer around. Anyone who qualifies
as disabled under the Social Security Act can be the beneficiary in a special
A special needs trust
allows you to leave money for the care of your loved one that won't count
against Supplemental Security Income, or SSI, and Medicaid benefit thresholds,
because the beneficiary doesn't own the assets.
To determine eligibility
for SSI, the federal government counts any resources above $2,000. Medicaid
income eligibility limits vary by state. Some states automatically approve
anyone receiving SSI benefits; others have their own income and asset limits.
Types of special needs trusts
The most common type of
special needs trust is a testamentary or third-party trust. This document is
drafted for future use, with no current funding. A self-settled or first-party
special needs trust is funded using the beneficiary's own assets, such as money
from a gift or a court settlement.
One important element
distinguishing first-party and third-party special needs trusts is the payback
"With a first-party
trust, if the special needs dependent dies and there are assets left in the
trust, the government is able to retrieve whatever assets are left. In a
third-party trust, that is not the case," says Don Brown, a special needs
planner for MetLife.
A third type, called a
pooled trust, is designed for grantors with limited assets.
"You would put your
money in with lots of other people's, and the trust document is taken care of
by a nonprofit organization," Brown says.
How to set one up
Setting up a special needs
trust is not a do-it-yourself project, says attorney Amos Goodall, a member of
the Special Needs Alliance, a national nonprofit organization of lawyers
serving disabled people and their families. A lawyer will know best how to
tailor the document to your individual circumstances and build in as much
flexibility as the law allows, he says.
The person you name as
trustee will be charged with managing the trust and distributing its assets on
behalf of the beneficiary. Burch prefers family member trustees, though he
acknowledges it's not always possible to find an appropriate relative.
"In that case, we
would have the family name a professional trustee, maybe search out a bank
trust department," says Burch, who also recommends naming at least one
David Light, a financial
adviser with Ameriprise, says whoever you pick for this duty should know the
beneficiary well. Light's parents chose a family member as the trustee for his
two special needs siblings, who are covered jointly in a single trust.
On the other hand, because
of the fiduciary responsibilities involved, Goodall favors institutional
trustees. "It's a complicated area for a trustee to navigate," he
Funding the special needs trust
If you're setting up a
third-party trust, you'll need to estimate how much assistance the beneficiary
will need and determine the source of those funds. Think of the process as an
extension of your retirement planning, Burch says. Once you've figured out the
amount of assets you'll need to live out your retirement years -- including
caring for your special needs child while you're alive -- you can determine
what remaining assets should be used to fund the trust.
"If the expectation is
that Mom and Dad will exhaust those assets in their lifetime, then you have to
start looking for other sources of funding," Burch says. "It could be
life insurance. It could be leaving the house into the trust."
The MetLife Center for
Special Needs Planning website has a link to a special needs calculator for
estimating expenses -- from housing and other general living costs to such
things as respite care, nursing services and personal needs.
Once the trust is funded,
the trustee has to file tax returns on behalf of the trust. Besides payments to
an accountant to handle that task, another potential operating cost is a
financial adviser to manage the assets. Burch says institutional trustees such
as banks usually charge a percentage of the assets in the trust, typically
ranging from 0.25% (for large accounts) to 2%.
The funds in special needs
trusts can be used to pay for anything from medical expenses not covered by SSI
and Medicaid to vacations and entertainment, as long as the expenditure helps
the named beneficiary. Medicaid and SSI officials review trust expenditures to determine
whether they are appropriate, Goodall says.
An optional letter of
intent attached to the trust allows you to express your wishes about how the
funds should be used, along with special notes about the beneficiary's
"It's the 'color of your
socks' letter," in which a parent might mention details like the fact that
an autistic child will only wear yellow socks, says Light. He calls the letter
of intent "one of the most underutilized tools in estate planning."
By Sonya Stinson. Published July 11, 2013 - Bankrate.com