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Special needs trusts, like cars, vary in quality. Some special needs trusts are old clunkers, unsafe, and barely functional; others are high quality and reliable under any weather condition. What determines the quality of a special needs trust? It depends on the various provisions or terms of the special needs trust. This article explains some key provisions that your attorney should consider including in your child’s special needs trust.
Strategic Mindset
Protecting your child’s future for life starts with a strategic mindset. You need to plan for your child’s future security as strategically as General Eisenhower planned for D-Day. In a 1957 speech, then-President Eisenhower offered these insights about military planning:
Plans are worthless, but planning is everything. There is a very great distinction because when you are planning for an emergency, you must start with this one thing: The very definition of "emergency" is that it is unexpected; therefore it is not going to happen the way you are planning.
In other words, to protect your child for life, you need a special needs trust that is written to expect the unexpected —engineered to respond and adapt to the unexpected.
Dallin H. Oaks, eminent jurist and law professor, agrees. He states that estate planning aims to “Plan specifically so you can implement flexibly.” In other words, you need to precisely craft the special needs trust to have the flexibility to respond to your child’s changing needs after you die.
Your child with a disability may survive you by twenty or thirty years or more. Here are a few things that may change over that time:
Here’s the takeaway: You cannot predict what exactly will change over your child’s lifetime, but you can design a special needs trust specifically written to expect, respond, and adapt to change.
The number one strategic imperative is flexibility. The trustee must have the power to adapt and respond to your child’s changing needs and circumstances. Too many run-of-the-mill special needs trusts unnecessarily restrict what the trustee can buy for the beneficiary. Too many run-of-the-mill special needs trusts do not anticipate various changes, such as changes in the law, your child moving to another state, or outliving the trustees or guardians. Too many ordinary special needs trusts do not plan for the unexpected.
Important Provisions to Consider Having in a Special Needs Trust
What If Laws Change?
One of the most important provisions to include in a special needs trust is an “amendment provision.” Sadly, over half the special needs trusts I review do not contain such a provision.
Remember, the special needs trust must last your child’s entire lifetime – possibly decades after you die. Given that length of time, your mantra should always be to plan for the unexpected. Accordingly, if government benefit laws change after you die, does the trustee or an independent person (called a “trust protector”) have the authority (as stated in the trust) to amend the trust to comply with any change in government benefit laws?
Here are two more “best practices” to consider:
What If Your Child Moves to Another State?
An amendment provision is good but not good enough by itself. What if the laws do not change, but your child’s residence changes to another state? The special needs trust should have a provision that empowers the trustee (or trust protector) to amend the trust to comply with the new state’s laws. Moving from one state to another is of particular concern regarding Medicaid eligibility.
Consider Giving the Acting Individual Trustee the Power to Appoint Successor Trustees
Obviously, the special needs trust must last your child’s lifetime. However, your child may outlive all the individual trustees you name. What can you do? First, I recommend you always name a corporate trustee of last resort to act if all the prior individual trustees are either unable or unwilling to act. Second, you should consider including a provision in the special needs trust that permits the individual acting trustee to appoint a successor trustee.
For example, imagine you have three young children, one with special needs. You name your brother as the first successor trustee. When your brother acts as a trustee, this “power to appoint a successor trustee” provision gives your brother the power to name one (or both) of your other children to act as successor trustee when they are older. This provision can also allow your brother, as the acting trustee, to name one of your children to act as co-trustee with your brother to learn the job of a trustee before becoming a sole trustee. And who knows, 50 years from now, the trustee may use this provision to appoint an unborn grandchild of yours to act as trustee of your child’s special needs trust.
Warning: Never Commingle Assets
This provision instructs the trustee of the third-party special needs trust never to commingle any assets owned by the beneficiary (your child) into the trust. This provision is so necessary that in the trusts I draft, I include similar language in two different places in the trust: 1) I put the language at the beginning of the trust as a flag to any person who reviews the trust at Social Security or Medicaid; and 2) I put the language in the trustee section so the trustee will notice it.
As you will recall, if the beneficiary funds a special needs trust, it’s called a first-party special needs trust, requiring a “Medicaid payback provision” when the beneficiary dies. You do not want the beneficiary funding a third-party special needs trust. It may cause all kinds of problems.
Permitting the Trustee to Fund an ABLE Account
You can give the trustee of the special needs trust authority to fund a qualified ABLE Account under Section 529A of the Internal Revenue Code.
Although this area of the law is not fully developed, here’s where the potential magic happens: Social Security does not count a distribution from an ABLE Account as income. If your child receives Supplemental Security Income (SSI), your child’s monthly cash benefit amount is reduced by the income your child receives. Social Security reduces the monthly cash benefit depending on the type of income: earned, unearned, or in-kind. Social Security defines In-kind support and maintenance (ISM) as unearned income in the form of food or shelter, or both.
I won’t go into Social Security's formula to value ISM. Simply put, if the trustee pays your child’s monthly rent, your child’s SSI monthly cash benefit would likely be reduced by one-third. However, suppose the trustee of the special needs trust deposits the rent payment into your child’s ABLE Account, and your child pays the rent bill from the ABLE Account. In that case, Social Security does not reduce your child’s monthly SSI cash benefit. The rent payment is not in-kind support and maintenance (ISM) because the ABLE Account is your child’s money.
Trustee Initiative
It is a good idea to state in the special needs explicitly trust that the trustee has the authority to initiate legal action, as necessary, to establish or defend the trust’s validity. Such occasions are rare, but your trustee may need the authority to take legal actions:
The special needs trust should serve the beneficiary's needs and support the trustee in carrying out the trustee's work. The trustee should be able to use trust assets to pay the costs incurred by such legal actions.
Do You Want Your Child to Live in a Home or Condo?
Do you want your child with special needs to live in your home after you die? Or in a condo purchased for your child? If so, your trustee may risk violating the prudent investor rule, which legally requires the trustee to invest the trust assets as a prudent person would. That means a “prudent” would diversify the trust's investments, which helps hedge against the volatility in stocks, bonds, real estate, and other markets.
For example, what if you plan to leave your home valued at $200,000 and another $100,000 in life insurance to your child’s special needs trust? You hope your child will continue living in your home after you pass. You might be asking the trustee to violate the prudent investor asset diversification standard by investing two-thirds of the trust assets in real estate. What if the real estate market crashes? What if the neighborhood goes downhill? The remainder beneficiaries of the trust (those people or charities who receive the assets in the trust after your child with a disability dies) could sue the trustee for a breach of their fiduciary duty.
What’s the solution? Your attorney can avoid this general diversification standard by drafting a provision that permits the trustee to invest in trust assets, regardless of diversification or whether the property would be considered a proper trust investment.
What If a Grandchild of Yours Has a Disability?
Will and trust forms typically distribute estates per stirpes.”Per stirpes is a Latin expression that means “by the root” or “by the branch.” An estate is distributed per stirpes if each family branch receives an equal share.
For example, imagine you have two children, Bob and Sally. Each of them has two children. Bob predeceases you. When you die, Sally receives half of your estate, and Bob’s share is divided equally between Bob’s two children. In other words, both “branches” of your family, Bob and Sally, receive equal shares.
A per stirpes designation means an unborn grandchild of yours might someday receive a portion of your estate. What if that grandchild has a disability? You don’t want the grandchild’s inheritance distributed outright to the grandchild, nor do you want the grandchild’s share going into a trust that is not a special needs trust. Both options may disqualify the grandchild from qualifying for SSI or Medicaid.
What fixes this problem is a “springing” supplemental needs trust provision. This provision gives the trustee the authority to establish a special needs trust for any beneficiary of your estate, if necessary. This provision does not apply to your child with a disability because your child already has a special needs trust. It’s for the surprising case. Again, you must always plan for the unexpected.
Special needs trusts, like cars, vary in quality. Some special needs trusts are old clunkers, unsafe, and barely functional; others are high quality and reliable under any weather condition. What determines the quality of a special needs trust? It depends on the various provisions or terms of the special needs trust. This article explains some key provisions that your attorney should consider including in your child’s special needs trust.
Strategic Mindset
Protecting your child’s future for life starts with a strategic mindset. You need to plan for your child’s future security as strategically as General Eisenhower planned for D-Day. In a 1957 speech, then-President Eisenhower offered these insights about military planning:
Plans are worthless, but planning is everything. There is a very great distinction because when you are planning for an emergency, you must start with this one thing: The very definition of "emergency" is that it is unexpected; therefore it is not going to happen the way you are planning.
In other words, to protect your child for life, you need a special needs trust that is written to expect the unexpected —engineered to respond and adapt to the unexpected.
Dallin H. Oaks, eminent jurist and law professor, agrees. He states that estate planning aims to “Plan specifically so you can implement flexibly.” In other words, you need to precisely craft the special needs trust to have the flexibility to respond to your child’s changing needs after you die.
Your child with a disability may survive you by twenty or thirty years or more. Here are a few things that may change over that time:
- Your child’s living situation may change. If your child lives with you now, maybe after you die, your child will move in with a sibling or into a residential program. Perhaps the trustee will buy a condo for your child. Your child may age out of a residential program or develop medical issues that require a nursing home.
- Your child’s health may change. Medical advances may improve your child’s condition. Or perhaps the medications your child takes become less effective, and your child’s symptoms worsen. The trustee of the special needs trust may have to pay for copays, deductibles, and private services not covered by benefits.
- Your child’s trustee, guardian, or caregivers may change: The trustee you name for the special needs trust after you die will likely not be the trustee for your child’s entire life. Similarly, the guardian for your child may change.
- State services for people with disabilities may change. Most states have recently faced revenue shortfalls, bringing in less money than they projected for public services.
- The laws regulating Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), Medicare, Medicaid, and other government benefits, may change. If your child moves to another state, the new state’s laws (particularly regarding Medicaid) may have different eligibility requirements.
- Your child’s work life may experience peaks and valleys. Your child may become unemployed and need government benefits. Perhaps your child lands the perfect job and is no longer eligible for SSI. Maybe your child tries a new job every couple of years.
Here’s the takeaway: You cannot predict what exactly will change over your child’s lifetime, but you can design a special needs trust specifically written to expect, respond, and adapt to change.
The number one strategic imperative is flexibility. The trustee must have the power to adapt and respond to your child’s changing needs and circumstances. Too many run-of-the-mill special needs trusts unnecessarily restrict what the trustee can buy for the beneficiary. Too many run-of-the-mill special needs trusts do not anticipate various changes, such as changes in the law, your child moving to another state, or outliving the trustees or guardians. Too many ordinary special needs trusts do not plan for the unexpected.
Important Provisions to Consider Having in a Special Needs Trust
What If Laws Change?
One of the most important provisions to include in a special needs trust is an “amendment provision.” Sadly, over half the special needs trusts I review do not contain such a provision.
Remember, the special needs trust must last your child’s entire lifetime – possibly decades after you die. Given that length of time, your mantra should always be to plan for the unexpected. Accordingly, if government benefit laws change after you die, does the trustee or an independent person (called a “trust protector”) have the authority (as stated in the trust) to amend the trust to comply with any change in government benefit laws?
Here are two more “best practices” to consider:
- State any amendment shall apply retroactively to the trust's inception;
- State the amendment can be made to the trust without court supervision.
What If Your Child Moves to Another State?
An amendment provision is good but not good enough by itself. What if the laws do not change, but your child’s residence changes to another state? The special needs trust should have a provision that empowers the trustee (or trust protector) to amend the trust to comply with the new state’s laws. Moving from one state to another is of particular concern regarding Medicaid eligibility.
Consider Giving the Acting Individual Trustee the Power to Appoint Successor Trustees
Obviously, the special needs trust must last your child’s lifetime. However, your child may outlive all the individual trustees you name. What can you do? First, I recommend you always name a corporate trustee of last resort to act if all the prior individual trustees are either unable or unwilling to act. Second, you should consider including a provision in the special needs trust that permits the individual acting trustee to appoint a successor trustee.
For example, imagine you have three young children, one with special needs. You name your brother as the first successor trustee. When your brother acts as a trustee, this “power to appoint a successor trustee” provision gives your brother the power to name one (or both) of your other children to act as successor trustee when they are older. This provision can also allow your brother, as the acting trustee, to name one of your children to act as co-trustee with your brother to learn the job of a trustee before becoming a sole trustee. And who knows, 50 years from now, the trustee may use this provision to appoint an unborn grandchild of yours to act as trustee of your child’s special needs trust.
Warning: Never Commingle Assets
This provision instructs the trustee of the third-party special needs trust never to commingle any assets owned by the beneficiary (your child) into the trust. This provision is so necessary that in the trusts I draft, I include similar language in two different places in the trust: 1) I put the language at the beginning of the trust as a flag to any person who reviews the trust at Social Security or Medicaid; and 2) I put the language in the trustee section so the trustee will notice it.
As you will recall, if the beneficiary funds a special needs trust, it’s called a first-party special needs trust, requiring a “Medicaid payback provision” when the beneficiary dies. You do not want the beneficiary funding a third-party special needs trust. It may cause all kinds of problems.
Permitting the Trustee to Fund an ABLE Account
You can give the trustee of the special needs trust authority to fund a qualified ABLE Account under Section 529A of the Internal Revenue Code.
Although this area of the law is not fully developed, here’s where the potential magic happens: Social Security does not count a distribution from an ABLE Account as income. If your child receives Supplemental Security Income (SSI), your child’s monthly cash benefit amount is reduced by the income your child receives. Social Security reduces the monthly cash benefit depending on the type of income: earned, unearned, or in-kind. Social Security defines In-kind support and maintenance (ISM) as unearned income in the form of food or shelter, or both.
I won’t go into Social Security's formula to value ISM. Simply put, if the trustee pays your child’s monthly rent, your child’s SSI monthly cash benefit would likely be reduced by one-third. However, suppose the trustee of the special needs trust deposits the rent payment into your child’s ABLE Account, and your child pays the rent bill from the ABLE Account. In that case, Social Security does not reduce your child’s monthly SSI cash benefit. The rent payment is not in-kind support and maintenance (ISM) because the ABLE Account is your child’s money.
Trustee Initiative
It is a good idea to state in the special needs explicitly trust that the trustee has the authority to initiate legal action, as necessary, to establish or defend the trust’s validity. Such occasions are rare, but your trustee may need the authority to take legal actions:
- The authority to determine whether or not the trust renders the beneficiary ineligible for governmental or private benefits;
- The authority to defend the trust against any contest or attack against the trust;
- The authority to seek a judgment of a court of the status of a matter in controversy, such as whether or not the trustee has to reimburse the government after the beneficiary dies or to determine how any distribution from the trust will affect the beneficiary’s benefits.
The special needs trust should serve the beneficiary's needs and support the trustee in carrying out the trustee's work. The trustee should be able to use trust assets to pay the costs incurred by such legal actions.
Do You Want Your Child to Live in a Home or Condo?
Do you want your child with special needs to live in your home after you die? Or in a condo purchased for your child? If so, your trustee may risk violating the prudent investor rule, which legally requires the trustee to invest the trust assets as a prudent person would. That means a “prudent” would diversify the trust's investments, which helps hedge against the volatility in stocks, bonds, real estate, and other markets.
For example, what if you plan to leave your home valued at $200,000 and another $100,000 in life insurance to your child’s special needs trust? You hope your child will continue living in your home after you pass. You might be asking the trustee to violate the prudent investor asset diversification standard by investing two-thirds of the trust assets in real estate. What if the real estate market crashes? What if the neighborhood goes downhill? The remainder beneficiaries of the trust (those people or charities who receive the assets in the trust after your child with a disability dies) could sue the trustee for a breach of their fiduciary duty.
What’s the solution? Your attorney can avoid this general diversification standard by drafting a provision that permits the trustee to invest in trust assets, regardless of diversification or whether the property would be considered a proper trust investment.
What If a Grandchild of Yours Has a Disability?
Will and trust forms typically distribute estates per stirpes.”Per stirpes is a Latin expression that means “by the root” or “by the branch.” An estate is distributed per stirpes if each family branch receives an equal share.
For example, imagine you have two children, Bob and Sally. Each of them has two children. Bob predeceases you. When you die, Sally receives half of your estate, and Bob’s share is divided equally between Bob’s two children. In other words, both “branches” of your family, Bob and Sally, receive equal shares.
A per stirpes designation means an unborn grandchild of yours might someday receive a portion of your estate. What if that grandchild has a disability? You don’t want the grandchild’s inheritance distributed outright to the grandchild, nor do you want the grandchild’s share going into a trust that is not a special needs trust. Both options may disqualify the grandchild from qualifying for SSI or Medicaid.
What fixes this problem is a “springing” supplemental needs trust provision. This provision gives the trustee the authority to establish a special needs trust for any beneficiary of your estate, if necessary. This provision does not apply to your child with a disability because your child already has a special needs trust. It’s for the surprising case. Again, you must always plan for the unexpected.