Who Needs a Special Needs Trust?
Estate planning involves not only your own future, but the future of your loved ones. The beneficiaries you select will inherit your accounts and your properties, so it's important to make sure that all your assets are in order before you pass. Being well organized is especially true if you have a child or loved one with a physical or mental disability in Tennessee or Kentucky.
Taking care of someone with special needs often means that you are the lifeline for their wellbeing and protecting and caring for the disabled person is a daily priority. Considering what would happen to that person without you can be a scary thought. Consider for the following scenario: Carrie's youngest child, Alex, has Down Syndrome. Alex has a part-time job at a grocery store in Clarksville and can perform basic self-care routines, but he cannot fully meet his own needs without assistance. Alex is now in his thirties, but he has lived with Carrie his whole life and continues to rely on Carrie to help with his finances and medical care. Carrie enjoys caring for her brother, but recently she has started to worry about long-term plans for Alex:
- Who would take care of him if something happened to her?
- How would he be able to afford basic living costs without her?
Carrie has a few options for providing for her disabled brother. She could leave Alex the whole of her net worth, but there would be no one appointed to help him use the funds in his best interest. She could leave her estate outright to another family member with the understanding that the family member will care for Alex, but there would be nothing that is legally binding to hold that personal accountable after Carrie dies.
Carrie needs an option that reserves part of her funds for Alex and also legally appoints someone to use those funds on his behalf. The best option by far is a Special Needs Trust.
What is a Special Needs Trust?
A special needs trust protects and provides for a physically or mentally disabled person, charging someone else with making sure the assets are used for that disabled person's care. When a special needs trust is created, the settlor (creator of the trust) appoints the disabled person as the beneficiary of the trust. The settlor also appoints a trustee who will manage the funds in the trust after the settlor passes.
To continue the example from earlier, Carrie wants to make sure that her brother will be taken care of after her death, so she creates a special needs trust with her estate attorney. Carrie is now the settlor of the trust and Alex is the beneficiary. After Carrie dies, Alex will inherit the assets of the trust. However, Alex's disability prevents him from being able to manage his finances independently. Carrie will need someone to act on his behalf – someone to manage the assets of the trust and to decide the best use of the funds on a regular basis. The person Carrie appoints to do this is called the trustee. The trustee's responsibility is to use the trust funds to protect and care for Alex after Carrie passes away. In this way, the special needs trust provides for the disabled person financially and ensures that someone is protecting their wellbeing when their caretaker passes away.
How Does a Special Needs Trust Affect Government Benefit Eligibility?
One of the primary purposes of the special needs trust, apart from appointing a third party to care for the disabled beneficiary, is to ensure that the beneficiary's inheritance will not disqualify the disabled person from government benefits, such as Medicaid and Supplemental Security Income (SSI). To secure continuing government benefits, special needs trusts must specifically state that the funds will not be used for the disabled person's daily needs. If a disabled person inherits a lump sum of money, that money will potentially disqualify the beneficiary from receiving assistance. In other words, the amount of money a disabled person inherits can make them ineligible to receive income-based government assistance, such as Medicaid or SSI. To avoid this, the terms of the trust must state that the trust funds can be used only as a supplement the disabled person's needs and not as a source for daily expenses. As long as the terms of the trust clarify that the funds cannot be used for day-to-day expenses, the money in the trust will not affect the beneficiary's eligibility for government assistance.
How Can Special Needs Trust Funds Be Used?
So the question is: if special need trust funds can't be used for daily living expenses, then how can the funds be helpful? Well, even though the trust fund can't be used for daily needs, it can be used to supplement a disabled person's necessities. For example, trust funds cannot be used to buy groceries, but they can be used to purchase a vehicle. Here are some other ways trust funds can be used to improve a disabled beneficiary's wellbeing:
- Purchase a home and pay for utilities
- Pay for assisted living or a nursing home
- Purchase a vehicle and pay for travel expenses
- Pay for educational expenses
Trust funds can also be used for personal items for the disabled person that aren't purchased daily, such as clothes or jewelry. However, using trust funds to purchase personal items can be a fine line, and the trustee needs to be careful to avoid purchases that would threaten the disabled person's government assistance. If you are the trustee of a special needs trust, always check with a special needs trust attorney before you make questionable purchases.
Setting Up a Special Needs Trust
Before you meet with your attorney, consider who you may want to appoint as the trustee(s) and what assets you may want to include in the trust. Your attorney can help you talk through your ideas before executing the trust.
To help your attorney consultation go smoothly, read through the following frequently asked questions and responses
Q. Can I have more than one beneficiary of a special needs trust?
In short, yes, but it's not the best idea. Creating one special needs trust for two disabled persons can be unwieldy and a bit tricky to manage. It is advisable to create two separate trusts for each beneficiary.
Q. Who should I choose to be a trustee?
When I meet with clients to create a special needs trust, one of the most important questions I ask is who they want to appoint as the trustee. Whomever is appointed as the trustee will have full responsibility for using trust funds in the disabled person's best interest. Your trustee should be familiar with your wishes for how to best care for the disabled person so that he or she will feel prepared for trustee responsibilities. The trustee also needs to be someone you wholeheartedly trust as they will likely be managing large amounts of money. If you do not have a close family member or friend, or are concerned about the burden these responsibilities will place on an individual, you can always appoint a trust company to manage the assets.
Q. How long does a special needs trust last?
The trust generally remains active for as long as the disabled beneficiary is still living. When the beneficiary dies, the trust is terminated. In the terms of the trust, the settlor can pre-determine where the remaining funds in the trust will go, such as to another family member, friend, or a charity such as a hospital or church.