Protecting Your Special Needs Child After Your Death: Supplemental Needs Trusts
How to provide for your special needs child after your death without interrupting your child’s benefits. Using a supplemental needs trust or special needs trust to protect your child after your death.
(Yes, I am an attorney, but I am not your attorney. Nothing here is intended as legal advice, nor does it create an attorney-client relationship. The information contained here is for educational or informational purposes only. Further, this post may contain affiliate links from which I receive a commission at no additional charge to you if you make a purchase.)
Are you concerned about the long-term provision for your special needs child? Do you care for your child now but have no idea how he or she will manage financially if something were to happen to you? Supplemental Needs Trusts (also called Special Needs Trusts or SNTs for short) are an important tool for your special needs child’s long-term care after you die.
If you are looking for a way for your child, who is under the age of 65, to still receive state and/or federal benefits but also receive gifts and/or inheritances, you need to consider a supplemental needs trust.
WHAT IS A SUPPLEMENTAL OR SPECIAL NEEDS TRUST?
A supplemental needs trust, among other benefits, is specifically designed for children who receive state or federal benefits due to their inability to gain sufficient financial independence because of disability or special needs.
The reality for many children with special needs is that they rely on means-tested benefits (more on that in a minute). Their insurance, monthly income, special services, or even their medical care comes from state or federal government benefits.
While some of these benefits are available to children regardless of the income or assets of their parents, in order to receive those benefits, the child must be of limited means. So, for as long as the parents’ assets remain in the parents’ names, the child remains eligible for the benefits.
Having a special needs child on public benefits means that you are also cautious about the amount of income that the child earns, the gifts that he or she receives, and the value of his or her assets. However, parents might give little thought to the value of their own assets for purposes of considering the child’s benefits.
If you die, however, what happens to your assets then? Do they pass to your children?
(Related Post: Why Every Parent Needs a Will to Protect Their Children)
WHAT HAPPENS TO BENEFITS WHEN A CHILD RECEIVES AN INHERITANCE
Under the law, an inheritance is deemed to vest in a beneficiary the mere moment before the decedent passes away. Thus, for purposes of means-tested benefits and supplemental needs trusts, time is of the essence.
Why? Well, you certainly wouldn’t want that little $10,000 gift from grandma to disqualify little Johnny for his medical care. If your child receives a gift, inheritance, or asset that exceeds the income/asset limits of your child’s state or federal benefits, then he could lose that benefit.
If your will or estate plan neglects to prepare for your child’s means-tested benefits, then you can’t fix it later. That gift is treated as your child’s regardless of whether you intended for your child remain on social security or Medicaid.
Your personal representative, executor, or administrator can’t fix that problem later.
Those public benefits may be wiped out for as long as the child has the asset. Or, even worse, the government may be able to seize the asset or gift to satisfy the amounts that the government already paid.
At any rate, for many who receive an inheritance and who receive means-tested benefits, the inheritance disqualifies them for ongoing benefits. Therefore, you have to qualify, apply, or petition yet again for the financial and medical benefits that the child had before the gift.
Who wants to go through that hassle again?
HOW DOES AN SNT PREVENT THE LOSS OF BENEFITS
An SNT, often settled by a third-party, on the other hand, vests the assets, the income, or the gift in a trustee who has limited rights to the property.
With an SNT the income, assets, or gifts pass to a third-party (not the disabled child) who then retains and manages the funds on behalf of the child. Those funds still benefit the child, but they do not disqualify the child from receiving his or her benefits.
The trustee may use the funds to pay for service providers, provide daily necessities, or even cover extravagant activities all while preserving necessary medical benefits.
For example, if your adult disabled child participates in group activities, he or she may be unable to cover the cost of a group trip with his or her income. However, the trust could cover the cost of that vacation or getaway. The trustee would pay the group facility directly rather than giving the money to the child.
Likewise, the trustee could use the funds for upgrading furniture, improving care, replacing clothing, or shopping for gifts all within the confines of the trust terms.
SNTs are extremely useful for protecting children and their benefits; however, you should always discuss the particular terms of your wishes, your assets, and your childs’ benefits with a qualified attorney who can tailor the terms of the trust to your plans.
WHO QUALIFIES FOR A SUPPLEMENTAL NEEDS TRUST?
Pursuant to federal and state law, you may establish an SNT for a disabled child who is either a minor or an adult. (Special rules apply to self-settled trusts and children over the age of 65 that are beyond the scope of this article.)
The full definition of a disabled individual is found at 42 U.S.S. § 1382.
However, for convenience here, let’s look at 2 important subsections of the definition:
- (3)(A) Except as provided in subparagraph (C), an individual shall be considered to be disabled for purposes of this subchapter if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months.
- (C)(i) An individual under the age of 18 shall be considered disabled for the purposes of this subchapter if that individual has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.
In other words, while you can see here that different rules apply for adults and minors, these trusts can apply to both adults and minors who have some sort of physical or mental disability that restricts their ability to participate in prolonged or gainful employment.
(Note, rules for disabled children over the age of 65 are different.)
HOW DOES A SUPPLEMENTAL NEEDS TRUST WORK?
One of the most common examples is a child with a chromosomal abnormality.
Specifically, while he or she may live a long and social life, he or she may lack important life skills. His or her ability to earn a livable wage or manage his or her own finances may be severely limited.
He or she may never live alone and may instead live in a group home rather than independently.
While you, as the parent, are able to care for that child during your lifetime, the odds that you outlive your child might be unlikely. Therefore, in order for the child to continue to both receive state and federal benefits and still live in the group home, your gift should pass through an SNT that provides for ongoing payment to the group home.
Further, in addition to preservation of lifestyle, you also want to consider the potential loss of medical benefits. Planning for your child’s care in the event of your untimely death is even more important if your child receives medical benefits.
SUPPLEMENTAL NEEDS TRUSTS PRESERVE MEDICAL BENEFITS
Some disabilities are exacerbated by the need for nearly constant specialized medical care –a burden that many families are ill-equipped to bear. Add to that the complex rules surrounding brands, providers, and suppliers of pharmaceuticals. An interruption of medication could be devastating for some special needs children.
Therefore, the medical burden is often shifted to the government based on the child’s inability to make a living wage. And, you would never want your child’s care or medication to cease simply because you failed to plan.
A Supplemental Needs Trust (SNT) is a convenient and effective way to provide for your special needs child long after you are gone as well as promote independence during life.
ESTATE PLANNING MISTAKES WITH DISABLED CHILDREN
Many if not most parents name their children as the beneficiary of their estate upon their deaths. Furthermore, many grandparents leave cash bequests to grandchildren.
Thus, your child may become the recipient of a large gift that becomes an asset available to that child immediately preceeding a death. If your child receives means-tested benefits, then that gift may immediately disqualify your child from necessary services or even medical care.
Even a relatively small amount could be detrimental to his or her benefits or could result in having to reapply.
SUPPLEMENTAL NEEDS TRUSTS PROVIDE FOR YOUR DISABLED CHILD
Discuss your estate plan, your family dynamics, and any means-tested benefits that your child receives with your estate planning attorney. He or she can determine the best method to pass on your wealth/savings/insurance policy/etc. to your child without disqualifying your child from benefits
Further, discuss your estate plan and your child’s means-tested benefits with your family so that they know to make necessary amendments to their estate plan.
(Related Post: Questions You Should Ask Your Parents about Their Estate Plan)
Paying that gift to a third party trustee through a supplemental needs trust allows your child to benefit without sacrificing his or her benefits.
This trustee should not only be competent to manage your child’s property but should also be familiar with the needs of your child.
(Related Post: Important Considerations for Naming Your Executor)
This could be another sibling, a trusted friend, or even a corporate trustee who is familiar with handling SNTs.
Regardless of who you name as trustee, the important lesson is to do the planning in advance –to do the planning now.
Providing for your child’s care and ongoing preservation of state or federal benefits is an essential part of your estate plan. Talk to an attorney in your jurisdiction today about setting up a supplemental needs trust to protect your child after you die.