Special Needs Require Careful Planning

As I often mention to my clients, how a beneficiary inherits from your estate is just as important as to what a beneficiary inherits. This is particularly true if the beneficiary has special needs and is receiving – or is likely to receive in the future – “means-tested” public benefits. These kinds of benefits are only available as long as the beneficiary is below a certain asset level. The concern is that an inheritance will suddenly increase the special needs beneficiary’s asset level, thereby abruptly eliminating the public benefits. After the beneficiary spends through the inheritance and is once again eligible for public benefits, it might be very difficult or even impossible for the beneficiary to successfully reapply for such benefits. Furthermore, the beneficiary might not be capable of managing the inheritance and might make poor financial decisions.

The solution is to set up a “special needs trust” (also known as a “supplemental needs trust”) for the benefit of the special needs beneficiary. The special needs trust names a third party as the trustee or “manager” of the trust. The special needs trust would not allow the beneficiary to have any right to force a distribution, which makes the assets of the special needs trust exempt from being considered an “available resource” to the beneficiary. The special needs trust will typically give the trustee full discretion on whether or not to make a distribution on behalf of the beneficiary. As long as the trustee makes sure to avoid distributions for “impermissible purposes” which the public benefits are designed to cover such as food, shelter, and clothing, the distributions will also not count as a resource to the beneficiary and will not affect the receipt of public benefits. The trustee may make distributions for purposes that are not covered by public benefits, such as entertainment and travel, which will not affect the receipt of public benefits. In this regard, the inheritance can still be available to the beneficiary without eliminating public benefits.

This type of special needs trust that is established by a third party as a gift or an inheritance for the special needs beneficiary is often referred to as a “third party special needs trust.” Such a trust may be a separate, independent trust or may be a sub-trust established as part of a Revocable Living Trust. Upon the death of the special needs beneficiary, the remaining balance of the trust may be transferred to anyone or any charity the trust maker decides. Unlike a “first party special needs trust” described below, a “third party special needs trust” does not require that the government be a beneficiary of the balance of the trust proceeds upon the death of the special needs beneficiary, though by mistake sometimes such a “payback provision” is included in such trusts.

Sometimes persons receiving means-tested public benefits will be legally entitled to a certain amount of money, the receipt of which would eliminate their benefits. The most common examples are proceeds from a lawsuit or a potential receipt of an inheritance where the benefactor did not plan ahead by creating a special needs trust for the beneficiary. Under certain circumstances, a “first party special needs trust” (also known as a “(d)(4)(A) trust”) may be established by a parent, grandparent, guardian, or the local court. The trust will operate in much the same way as a “third party special needs trust” with one key difference: a “payback provision” that pays the balance of the trust upon the death of the special needs beneficiary to the government as reimbursement for public benefits paid out is a requirement. If there are any trust funds left after reimbursement to the government, such funds may go to remainder beneficiaries such as family members or friends.

Even after taking the time to establish a special needs trust for the benefit of a special needs beneficiary, it is important that your overall estate plan is coordinated. For example, retirement plans, life insurance policies, and payment on death accounts often name beneficiaries directly, which would bypass the special needs trust. In such a situation, it is critical to make sure that beneficiary designations on such accounts are updated to name the special needs trust as the beneficiary.

A qualified attorney can help you navigate these complicated issues.