Special Needs Trusts (SNT) may be appropriate in planning for the aging parents and their child with a disability. Depending on the specific facts, the client’s objectives, and the timing involved, a solid plan may include drafting both TRUSTS, and funding either or both of them.
In the event the parent either doesn’t require long term care, or has sufficient income and resources to pay privately for her care, or has long term care insurance, then there should be assets remaining in her name at her death that can be used to fund a Testamentary Special Needs Trust for the benefit of her child with a disability
A SNT is a discretionary spendthrift trust created for a disabled beneficiary which supplements but does not supplant public benefits for which the beneficiary may be eligible. It must be carefully drafted to conform with federal and state statutory and regulatory requirements to assure the ongoing SSI and Medicaid eligibility of the person with a disability.
A Testamentary SNT is a third party SNT that is established under the parent’s Last Will and Testament for the benefit of the child with the disability. Because it is established under the individual’s Will the Trust, of course will not be funded until the Will is probated.
Assets that may be used to fund a Testamentary SNT include personal property, real property, cash, stock, investment accounts, life insurance proceeds (if the Trustee of the SNT was named as the beneficiary), and pension survivor benefits (again, if the Trustee of the SNT was named as the beneficiary).
The Trustee of this SNT has and important task. He must carefully comply with the terms of the Trust so as not to inadvertently disqualify the beneficiary from public benefits. He must make investment decisions, and file tax returns. He will purchase goods and services for the beneficiary, but will not distribute cash to him. He may find himself having to defend the Trust in the event that the Social Security Administration or the Department of Family and Children Services mistakenly determines that the Trust is a resource to the beneficiary and denies him public benefits eligibility.
The benefit to planning with such a SNT is obvious: because the funds held in the Trust are third party funds there is no transfer penalty, and a payback to Medicaid after the beneficiary’s death is not necessary. Further, this Trust is not affected by the age restrictions on self-settled Special Needs Trusts (i.e., less than age 65). AS such, it is not wise to commingle estate planning (third-party) Special Needs Trust funds with the beneficiary’s (self-settled) Special Needs Trust funds with the beneficiary’s (self-settled) Special Needs Trust funds. The option of establishing such a trust should be very seriously considered in any estate plan involving a disabled beneficiary.
If advance planning does not involve a Testamentary SNT and the parent dies intestate or with a Will that provides for assets to be distributed directly to the beneficiary, then the only option to “save” the inheritance will likely be to establish a Section d4A self settled SNT. However, to do so while maintaining SSI and/or Medicaid eligibility requires that the SNT include a pay-back provision, with the result that Medicaid is the first remainder beneficiary. Further, if the beneficiary is 65 years of age or older it may be impossible to establish a self-settled SNT.
Continue… Special Needs Trust for Sole Benefit of Child with Disability.