Individuals who have special needs will often have those needs long after the people who have done their best to meet them are gone. Additionally, because people with disabilities of various kinds often rely heavily on needs-based public support services, simply depositing funds into an account with the special needs individual’s name is typically not a practical solution for ensuring that the person has access to financial support or even medical care. Special needs planning is the go-to strategy for families and especially the parents of children with special needs, particularly as the parents age and the children grow into adulthood. One of the most common recommendations in special needs planning is the establishment of a special needs trust (SNT), but the way the trust is funded and managed can have a significant impact on how well it serves its intended function.
At The Binder Firm, we usually like to begin any work in special needs planning by discussing our client’s primary concerns and the outcomes they most want to achieve. This enables us to recommend a set of special needs planning tools tailored to address the core concerns without introducing more complexity than is needed.
There are two main reasons to form a special needs trust. Often the two work together, but conceptually it can be helpful to consider them separately, as two purposes that in practice tend to be mutually supportive.
One frequently cited reason for forming a special needs trust is to ensure that the person with special needs who is named as the beneficiary of the trust continues to have access to resources even when their primary caregiver is no longer available to provide for the special needs person. This scenario is one of common concern among parents of special needs adults; as the parents grow older, they often worry about what will happen to their adult children whose care needs will not change once their parents are someday gone. Forming a special needs trust can allow these parents to set aside funds to provide for the long-term care of their adult special needs children. Choosing an appropriate trustee is one of the most critical factors in how well a special needs trust ultimately satisfies this purpose.
With or without concerns about parental aging, a special needs adult may often benefit from the establishment of a special needs trust that safeguards the individual’s access to critical social safety net resources such as Medicaid. Often, access to supportive care is unfortunately dependent on regular “needs-based” assessments. These “needs” are often defined primarily in terms of financial resources, and in many cases the assessments do not fully account for the expenses associated with the individual’s care, or the practicality of accessing alternative support outside of state/federal programs. For these reasons, a special needs individual may lose access to critical healthcare and support through having income or savings even a few dollars over the program threshold (this amount varies by program), irrespective of whether the individual has realistic access to an alternative and even without considering whether the individual is able to superintend the process of applying for additional forms of aid to address their own needs.
In these instances, a special needs trust can function in a manner similar to the “asset protection trusts” used in Medicaid planning. As the Special Needs Alliance (SNA) explains, placing the assets in an irrevocable trust removes them from calculation with the special needs individual’s personal assets and means that the trust assets will not “count against” his or her eligibility for needs-based support programs. Here again, the choice of trustee is crucial, but with a special needs trust of this type, the parent or other caregiver setting up the trust often has an opportunity to find and work with a co-trustee who can help ensure the continuity of asset management if and when anything happens to the caregiver.
There are two main types of special needs trusts. They each serve the same essential purpose (or purposes) for the special needs individual, but they are distinguished by who is responsible for funding them. A first-party special needs trust is funded with assets belonging to the person who has the disability and will benefit from the proceeds of the trust once it is established. A third-party special needs trust is funded by someone other than the disabled individual, often a parent or other close relative.
To effectively ensure the special needs person can benefit from assets contained in the SNT without jeopardizing his or her access to critical support services, the SNT must follow specific rules. These rules vary somewhat depending on whether the trust in question is a first-party SNT vs. one funded by a third party. The details do matter, but as a broad statement from which to begin the discussion, we may say that first-party SNTs tend to be subject to somewhat more restrictive oversight than their third-party counterparts.
Because the grantor of a first-party special needs trust is the person with the special needs, setting up a first-party SNT will require the disabled person to first hold some assets, often substantial, in his or her own name, prior to forming the trust. This type of net worth is much more common in some scenarios than in others. An individual who becomes severely disabled as a result of an accident or illness well into adulthood may have a personal injury settlement or personal savings to place in the trust. Someone who has been disabled from an early age is less likely to have those resources, but may sometimes have access to assets from other sources, with a common example coming in the form of inheritance or property left to the individual in the Last Will and Testament of a close relative or family friend.
If the individual funding the trust is not the person who will benefit from its resources, then obviously, the need for the special needs person to have independent funds will not apply. Third-party SNTs tend to be more common when the special needs person has had the disabling condition for an extended period of time, often since childhood, and has had little to no opportunity to build up significant savings or other financial assets as a result. Often, third-party SNTs are established by parents or grandparents as part of these family members’ estate planning.
One of the most important distinctions between first-party vs. third-party SNTs is that Medicaid can typically recover the costs of an individual’s care from a first-party special needs trust. For this reason, the American College of Trust and Estate Counsel (ACTEC) explains that it is critical not to combine first-party and third-party SNTs into a single trust account. Although it might seem smart to combine resources, it is possible that the commingling of third-party assets that are typically not subject to Medicaid repayment obligations with first-party assets from which state Medicaid offices will have the right to recover costs equal to the amount Medicaid has paid for the individual’s care may put the assets contributed by a third party, such as the special needs individual’s parents, in jeopardy.
While the person who has benefitted from the SNT during his or her lifetime will obviously no longer need funds that are being recovered by Medicaid after the individual’s death, in general people who go to the trouble of setting up this type of trust hope that any funds that remain unused at the time of the beneficiary’s death can go to some other cause, such as medical research or a charity supporting other people with the same conditions that put the trust beneficiary in position to need the SNT. At The Binder Firm, we usually like to sit down with the person considering an SNT and discuss with them not just the type of trust they want to form, but their goals for doing so and their vision for the future of that trust beyond both their own lifetimes and the lifetime of the beneficiary.
This kind of conversation can sometimes be challenging because it forces us to confront long-term possibilities most people very reasonably do not enjoy contemplating. However, having those potentially uncomfortable conversations upfront can sometimes result in a trust that handles assets more securely, meets the beneficiary’s needs more efficiently, and ultimately creates a more meaningful legacy than would otherwise be possible.
The type of disability that affects the individual can affect not only the resources they are likely to have but also the degree of independence they are able to exercise in managing their assets. Although many of us are used to hearing the term “special needs” used most often in connection with an individual who has developmental disabilities, the truth is that there are a number of physical impairments that can require intensive (and expensive) ongoing care, and setting up a trust to protect assets and ensure Medicaid eligibility can often be helpful in those situations just as it can for individuals with intellectual disabilities or those who may need coverage for long-term care as they age.
Although individuals who are likely to need substantial care for much or all of their lifetimes can benefit from the same type of trust for a variety of reasons, parents of adult special needs children are among the groups who most often seek out information about how to set up SNTs. At The Binder Firm, we understand a parent’s deep love for their child and the concern the parents of a special needs child (even one who has long since entered adulthood) may feel when they contemplate a future in which they can no longer be present to provide love, support, and material resources. Contact our Kansas City estate planning team today to schedule a consultation so that we can discuss your situation and help you find the right set of estate planning tools to make sure that the effects of your love will remain with your child for as long as they are needed. Contact us to get started.