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When your child becomes a legal adult, you will face three primary legal issues:
This chapter explains the special needs trust.
A trust is a unique combination of property rights; it separates who is responsible for managing the assets in the trust from who benefits from those assets.
A trust has three “players”:
When you set up a third-party special needs trust for your child, you will likely be both the grantor and the trustee. Your child will be the beneficiary.
Another way of thinking about a trust is to imagine it as a basket. You can put money or other assets into the basket. The assets in the basket are for the benefit of your child. If the special needs trust is drafted correctly, your child does not own or control any of the assets in the basket. If your child does not own or control the assets in the trust then Social Security and Medicaid will not count the trust assets when determining your child’s financial eligibility for SSI or Medicaid.
However, not any trust will do. There are countless types of trusts. Only special needs trusts are intentionally written so the assets in the trust will not count as your child’s resource. Social Security or Medicaid will not count the assets in the special needs trust when determining your child’s financial eligibility for “means-tested” benefits like SSI or Medicaid.
When setting up a special needs trust, you want to achieve five primary goals:
What Happens If You Die Without a Special Needs Trust for Your Child?
Suppose you die without a special needs trust and accidentally leave an inheritance directly to your child with a disability. In that case, you will jeopardize your child’s future security for many reasons:
Here are the three most common ways parents accidentally leave money directly to their child with a disability:
You Die Without a Will
If you die without a will, a probate law in your state, often called a Descent and Distribution statute, determines who inherits your estate when you die. Depending upon your state’s law, your estate will be divided in different percentages between your spouse (if one) and your children. Here’s the problem: The share for your child with a disability will go to your child outright - not into a special needs trust.
You Name Your Child with a Disability as a Beneficiary On Your Retirement Plan, IRA, Life Insurance, or Annuity
Naming your child with a disability on a beneficiary form is an easy mistake to make. Maybe years ago, when you signed up for your company retirement plan or bought life insurance, you named your spouse as the primary beneficiary and your “children” as the secondary beneficiaries. If your spouse predeceases you, your child with a disability will inherit their share outright.
Your Will or Trust is Outdated
Maybe your will was written before your child with a disability was born. Perhaps your old will includes a trust for your minor children, but the trust is not a special needs trust. You may have a poorly drafted special needs trust. Whatever the case, if the inheritance you leave for your child with a disability does not go into a properly drafted special needs trust, the assets in the trust may disqualify your child from receiving government benefits.
What are the Rules of a Special Needs Trust?
Think of the trust as a booklet of rules. The trust document states the rules the trustee must follow, such as the following:
There is only one way to discover the rules of a special needs trust: Read the trust. You may be surprised that the terms of special needs trusts vary, depending on who drafted them. For example, special needs often vary significantly regarding what the trustee is permitted to buy for the beneficiary.
Although special needs trusts vary, all special needs trusts have one thing in common: They are all written, so the assets in the trust will not count as the beneficiary’s resource. When Social Security or Medicaid determines the beneficiary's eligibility for benefits, they will not count the assets in the special needs trust.
How does an attorney draft a special needs trust so that the assets do not count as an asset (Social Security uses the word resource) of the trust’s beneficiary? To answer that question, consider the Social Security Administration’s regulations (Section 416.1201) defining “resources.”
_____________________________________________________________________________
Resources mean cash or other liquid assets or any real or personal property that an individual owns and could convert to cash to be used for his or her support and maintenance. If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual.
_____________________________________________________________________________
This regulation has been interpreted to mean that assets in a trust will not be considered the trust beneficiary’s assets unless the trust beneficiary has the legal right to demand distributions be made from the trust for the beneficiary’s support or maintenance. The Social Security Administration’s Programs Operation Manual System (POMS Section SI 1120.200) states the rule as follows:
_____________________________________________________________________________
Trust principal is a resource for SSI purposes if a trust beneficiary (applicant, recipient, or deemor) has legal authority to revoke or terminate the trust and then use the funds to meet his or her food or shelter needs. The trust principal is also a resource for SSI purposes if the trust beneficiary can direct the use of the trust principal for his or her support and maintenance under the terms of the trust.
_____________________________________________________________________________
The key to drafting a special needs trust is ensuring the trustee – someone other than your child – has all the control over the assets in the trust. Although your child is the trust beneficiary, the trustee has all the control over the trust assets. If your child has any control over the assets, then Social Security would likely determine that the assets in the trust are your child's resource.
The Importance of the Spendthrift Provision
Social Security rules state, “if the trust beneficiary can sell his or her beneficial interest in the trust, that interest is a resource.” The rule continues with an example:
______________________________________________________________________________
For example, if the trust provides for payment of $100 per month to the trust beneficiary for spending money, and the trust does not have a valid spendthrift clause, then the trust beneficiary may be able to sell the right to future payments for a lump-sum settlement. The present value of future payments counts as a resource. (POMS Section SI 1120.200)
______________________________________________________________________________
To prevent the beneficiary’s right to sell future payments from the special needs trust, the trust must include a spendthrift provision. Here’s Social Security’s definition of a spendthrift provision:
______________________________________________________________________________
A spendthrift clause or trust prohibits both involuntary and voluntary transfers of the beneficiary's interest in the trust income or principal. This means that the beneficiary's creditors must wait until money is paid from the trust to the beneficiary before they can attempt to claim it to satisfy debts. It also means that, for example, if the beneficiary is entitled to $100 a month from the trust, the beneficiary cannot sell his or her right to receive the monthly payments to a third party for a lump sum. In other words, a valid spendthrift clause would make the value of the beneficiary’s right to receive payments not countable as a resource…. (POM SI 01120.200B.16)
______________________________________________________________________________
Testamentary Versus Living Special Needs Trusts
A special needs trust can be testamentary or living. A living special needs trust becomes “alive” once you sign it. It is a standalone document. You can title assets in the name of a living trust. (See a later chapter on funding the special needs trust.)
In contrast, a testamentary special needs trust does not become “alive” until you die. It is not a separate stand-alone document. It is a sub-trust inside your will or living trust.
Living special needs trusts have some advantages:
Although there are some advantages to living special needs trusts, do not fret if your attorney chooses to draft a testamentary special needs trust. They are widespread and, in some circumstances, preferable. Nonetheless, they do not offer the range of options that living special needs provide:
Although living special needs trusts may sound like the way to go, they can also be a trap or the unwary. As you will learn in a later chapter discussing the difference between third-party and first-party special needs trusts, you should never deposit your child’s money into a living third-party special needs trust. Many parents with a living special needs trust forget this rule and deposit their child’s money into the third-party special needs trust causing all sorts of problems. (See the later chapter on third-party and first-party special needs trusts.)
The Name of the Trust
How you name a special needs trust does not matter legally. For example, let’s say Dan and Mary Jones have a child, Robert, with Down Syndrome. Their attorney might name the special needs trust in many ways: The Robert Jones Special Needs Trust, The Robert Jones Supplemental Needs Trust, The Robert Jones Third-party Special Needs Trust, The Robert Jones Discretionary Care Trust, etc.
Legally, the name does not matter. What matters are the terms of the trust.
Although you could give the trust any name, as a practical matter, I recommend using words like “special needs trust” or “supplemental needs trust.” These words signal to anyone reviewing the trust at Social Security or Medicaid that the trust intends to preserve the beneficiary’s eligibility for SSI and Medicaid. It’s the path of least resistance. If the name of the trust is just “The Robert Jones Trust,” the trust could receive extra scrutiny from Social Security or Medicaid reviewers.
Who Receives the Remaining Assets in the Trust After Your Child Dies?
When you set up what’s called a third-party special needs trust (the most likely type of special needs trust you will use to be defined in a later chapter) for your child, you will name who you want to receive any remaining assets in the trust after your child dies. These people or charities are called remainder beneficiaries.
Since you created the trust, you can “cut up the pie” of assets any way you like. For example, you could give fifty percent in equal shares to your then-living children, twenty-five percent to charity one, and twenty-five percent to charity two. What if your child with special needs has a child? Do you want any remaining assets in the special needs trust to be distributed to the children of your special needs child or not?
When your child becomes a legal adult, you will face three primary legal issues:
- Legal advocacy;
- Government benefits; and
- The special needs trust.
This chapter explains the special needs trust.
A trust is a unique combination of property rights; it separates who is responsible for managing the assets in the trust from who benefits from those assets.
A trust has three “players”:
- The person who establishes the trust is the grantor (also called a settlor or trustor);
- The person or corporation who manages the assets in the trust is the trustee; and
- The person who benefits from the trust assets is the beneficiary.
When you set up a third-party special needs trust for your child, you will likely be both the grantor and the trustee. Your child will be the beneficiary.
Another way of thinking about a trust is to imagine it as a basket. You can put money or other assets into the basket. The assets in the basket are for the benefit of your child. If the special needs trust is drafted correctly, your child does not own or control any of the assets in the basket. If your child does not own or control the assets in the trust then Social Security and Medicaid will not count the trust assets when determining your child’s financial eligibility for SSI or Medicaid.
However, not any trust will do. There are countless types of trusts. Only special needs trusts are intentionally written so the assets in the trust will not count as your child’s resource. Social Security or Medicaid will not count the assets in the special needs trust when determining your child’s financial eligibility for “means-tested” benefits like SSI or Medicaid.
When setting up a special needs trust, you want to achieve five primary goals:
- You want the assets in the trust to not disqualify your child from receiving means-tested government benefits like SSI or Medicaid;
- You want the trust assets to provide your child with a good quality of life;
- You want to give the trustee as much discretion as possible to buy whatever goods or services your child may need in the future;
- You want the trust assets safe from state cost-of-care claims;
- After you (the trustee) die or become incapacitated, you want a relative, friend, or financial institution to be the successor trustee to manage your child’s inheritance.
What Happens If You Die Without a Special Needs Trust for Your Child?
Suppose you die without a special needs trust and accidentally leave an inheritance directly to your child with a disability. In that case, you will jeopardize your child’s future security for many reasons:
- If your child has an intellectual disability, your child will be unable to manage their inheritance;
- Your child will be financially ineligible to receive means-tested government benefits like SSI or Medicaid;
- A financial predator may steal your child’s inheritance;
- Your child may give their inheritance away;
- The state may seize your child’s inheritance for cost-of-care claims;
- Private creditors may collect on debts;
- A guardian of the estate (called conservatorship in some states) may be appointed by the court to manage the inheritance. If your child cannot manage the inheritance, court oversight is welcome. However, you usually want to avoid guardianship of the estate (not to be confused with a guardian of the person) because a guardian of the estate has several legal requirements, such as posting a bond, annual accountings, and court supervision. Plus, the assets under guardianship still count as a resource of the ward (the person with a disability), disqualifying the ward from receiving benefits like SSI or Medicaid.
Here are the three most common ways parents accidentally leave money directly to their child with a disability:
You Die Without a Will
If you die without a will, a probate law in your state, often called a Descent and Distribution statute, determines who inherits your estate when you die. Depending upon your state’s law, your estate will be divided in different percentages between your spouse (if one) and your children. Here’s the problem: The share for your child with a disability will go to your child outright - not into a special needs trust.
You Name Your Child with a Disability as a Beneficiary On Your Retirement Plan, IRA, Life Insurance, or Annuity
Naming your child with a disability on a beneficiary form is an easy mistake to make. Maybe years ago, when you signed up for your company retirement plan or bought life insurance, you named your spouse as the primary beneficiary and your “children” as the secondary beneficiaries. If your spouse predeceases you, your child with a disability will inherit their share outright.
Your Will or Trust is Outdated
Maybe your will was written before your child with a disability was born. Perhaps your old will includes a trust for your minor children, but the trust is not a special needs trust. You may have a poorly drafted special needs trust. Whatever the case, if the inheritance you leave for your child with a disability does not go into a properly drafted special needs trust, the assets in the trust may disqualify your child from receiving government benefits.
What are the Rules of a Special Needs Trust?
Think of the trust as a booklet of rules. The trust document states the rules the trustee must follow, such as the following:
- What can the trustee buy for the beneficiary? What can’t the trustee buy for the beneficiary?
- Can the trustee give money directly to the beneficiary?
- Can the trustee or a “trust protector” amend the trust if laws change?
- After the beneficiary dies, to whom must the trustee distribute any remaining trust assets?
There is only one way to discover the rules of a special needs trust: Read the trust. You may be surprised that the terms of special needs trusts vary, depending on who drafted them. For example, special needs often vary significantly regarding what the trustee is permitted to buy for the beneficiary.
Although special needs trusts vary, all special needs trusts have one thing in common: They are all written, so the assets in the trust will not count as the beneficiary’s resource. When Social Security or Medicaid determines the beneficiary's eligibility for benefits, they will not count the assets in the special needs trust.
How does an attorney draft a special needs trust so that the assets do not count as an asset (Social Security uses the word resource) of the trust’s beneficiary? To answer that question, consider the Social Security Administration’s regulations (Section 416.1201) defining “resources.”
_____________________________________________________________________________
Resources mean cash or other liquid assets or any real or personal property that an individual owns and could convert to cash to be used for his or her support and maintenance. If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual.
_____________________________________________________________________________
This regulation has been interpreted to mean that assets in a trust will not be considered the trust beneficiary’s assets unless the trust beneficiary has the legal right to demand distributions be made from the trust for the beneficiary’s support or maintenance. The Social Security Administration’s Programs Operation Manual System (POMS Section SI 1120.200) states the rule as follows:
_____________________________________________________________________________
Trust principal is a resource for SSI purposes if a trust beneficiary (applicant, recipient, or deemor) has legal authority to revoke or terminate the trust and then use the funds to meet his or her food or shelter needs. The trust principal is also a resource for SSI purposes if the trust beneficiary can direct the use of the trust principal for his or her support and maintenance under the terms of the trust.
_____________________________________________________________________________
The key to drafting a special needs trust is ensuring the trustee – someone other than your child – has all the control over the assets in the trust. Although your child is the trust beneficiary, the trustee has all the control over the trust assets. If your child has any control over the assets, then Social Security would likely determine that the assets in the trust are your child's resource.
The Importance of the Spendthrift Provision
Social Security rules state, “if the trust beneficiary can sell his or her beneficial interest in the trust, that interest is a resource.” The rule continues with an example:
______________________________________________________________________________
For example, if the trust provides for payment of $100 per month to the trust beneficiary for spending money, and the trust does not have a valid spendthrift clause, then the trust beneficiary may be able to sell the right to future payments for a lump-sum settlement. The present value of future payments counts as a resource. (POMS Section SI 1120.200)
______________________________________________________________________________
To prevent the beneficiary’s right to sell future payments from the special needs trust, the trust must include a spendthrift provision. Here’s Social Security’s definition of a spendthrift provision:
______________________________________________________________________________
A spendthrift clause or trust prohibits both involuntary and voluntary transfers of the beneficiary's interest in the trust income or principal. This means that the beneficiary's creditors must wait until money is paid from the trust to the beneficiary before they can attempt to claim it to satisfy debts. It also means that, for example, if the beneficiary is entitled to $100 a month from the trust, the beneficiary cannot sell his or her right to receive the monthly payments to a third party for a lump sum. In other words, a valid spendthrift clause would make the value of the beneficiary’s right to receive payments not countable as a resource…. (POM SI 01120.200B.16)
______________________________________________________________________________
Testamentary Versus Living Special Needs Trusts
A special needs trust can be testamentary or living. A living special needs trust becomes “alive” once you sign it. It is a standalone document. You can title assets in the name of a living trust. (See a later chapter on funding the special needs trust.)
In contrast, a testamentary special needs trust does not become “alive” until you die. It is not a separate stand-alone document. It is a sub-trust inside your will or living trust.
Living special needs trusts have some advantages:
- You can open a financial account in the name of the special needs trust and make a deposit;
- Relatives, in their own will or trust, can gift assets to the special needs trust;
- You can easily name the living special needs trust as a beneficiary on your life insurance, retirement plan, IRA, annuity, or another account. You can also name a testamentary trust; it’s just a little more complicated to do so;
- Because it is a standalone document, giving a copy to Social Security or Medicaid for review is easier.
Although there are some advantages to living special needs trusts, do not fret if your attorney chooses to draft a testamentary special needs trust. They are widespread and, in some circumstances, preferable. Nonetheless, they do not offer the range of options that living special needs provide:
- You cannot open a financial account in the name of the special needs trust because it’s not in existence until after you die;
- Relatives cannot make a gift to the special needs trust in their will because the trust is not yet in existence;
- Although you can name a testamentary special needs trust as a beneficiary, the wording of the beneficiary designation is longer, which may cause problems with online beneficiary forms that have limited space;
- Social Security and Medicaid representatives generally prefer reviewing a stand-alone special needs trust. Some Social Security representatives may not fully understand the concept of a testamentary special needs trust, a sub-trust inside your will or living trust.
Although living special needs trusts may sound like the way to go, they can also be a trap or the unwary. As you will learn in a later chapter discussing the difference between third-party and first-party special needs trusts, you should never deposit your child’s money into a living third-party special needs trust. Many parents with a living special needs trust forget this rule and deposit their child’s money into the third-party special needs trust causing all sorts of problems. (See the later chapter on third-party and first-party special needs trusts.)
The Name of the Trust
How you name a special needs trust does not matter legally. For example, let’s say Dan and Mary Jones have a child, Robert, with Down Syndrome. Their attorney might name the special needs trust in many ways: The Robert Jones Special Needs Trust, The Robert Jones Supplemental Needs Trust, The Robert Jones Third-party Special Needs Trust, The Robert Jones Discretionary Care Trust, etc.
Legally, the name does not matter. What matters are the terms of the trust.
Although you could give the trust any name, as a practical matter, I recommend using words like “special needs trust” or “supplemental needs trust.” These words signal to anyone reviewing the trust at Social Security or Medicaid that the trust intends to preserve the beneficiary’s eligibility for SSI and Medicaid. It’s the path of least resistance. If the name of the trust is just “The Robert Jones Trust,” the trust could receive extra scrutiny from Social Security or Medicaid reviewers.
Who Receives the Remaining Assets in the Trust After Your Child Dies?
When you set up what’s called a third-party special needs trust (the most likely type of special needs trust you will use to be defined in a later chapter) for your child, you will name who you want to receive any remaining assets in the trust after your child dies. These people or charities are called remainder beneficiaries.
Since you created the trust, you can “cut up the pie” of assets any way you like. For example, you could give fifty percent in equal shares to your then-living children, twenty-five percent to charity one, and twenty-five percent to charity two. What if your child with special needs has a child? Do you want any remaining assets in the special needs trust to be distributed to the children of your special needs child or not?