I have often commented that how a beneficiary inherits is often as important – and in some cases more important – than what a beneficiary inherits. This maxim is particularly important when it comes to beneficiaries with special needs. Often, public benefits that are available to special needs beneficiaries such as SSI and Medi-Cal are “means-tested,” which means that the beneficiary’s assets cannot exceed a certain amount. With regard to Estate Planning, the concern is that a special needs beneficiary’s inheritance will increase the beneficiary’s assets to the point where such public benefits will be eliminated. The key to preventing this from happening is to establish a Special Needs Trust (“SNT”) for the special needs beneficiary’s inheritance.
The idea behind an SNT is to restrict the special needs beneficiary’s rights in the inheritance so that it won’t count as an asset or a “resource” of the beneficiary. The trustee will be instructed to use the SNT’s assets to “supplement but not supplant” needs-based government benefits. For example, the trustee will not be permitted to use the SNT assets to pay for the beneficiary’s food or shelter as public benefits are often available for such needs. On the other hand, the trustee would be permitted to use the SNT assets to pay for the beneficiary’s entertainment and other comforts that are not provided by public benefits.
A key issue in designing an SNT is to make a prudent selection for the trustee. The SNT should last for the lifetime of the special needs beneficiary so it is important to name a younger person as trustee and to name several alternate trustees should the first trustee no longer be willing or able to continue to act as trustee. Alternatively, naming a bank or trust company as trustee might make the most sense since such institutions will most likely continue to be in existence for the lifetime of the special needs beneficiary.
An SNT may either be embedded in a Revocable Living Trust or may stand alone as a separate and independent document. Although it often involves additional expense to create a separate “stand alone” SNT, if the creators of the trust feel that other family members and friends might want to make gifts or bequests to the special needs beneficiary, such a separate SNT makes the most sense.