Posted on January 14, 2021
Parents of disabled children often worry about what will happen to their disabled child when they (the parents) are no longer living. In many instances, when the parent is no longer around to pay the costs of providing for the child’s needs, that responsibility will in large part fall to the government. However, some of the most important benefits available to disabled persons are “means-tested”, meaning that they are confined to persons who have minimal financial resources and/or income of their own.
So the concern becomes: How do I provide for the anticipated future needs of my disabled child without compromising their ability to qualify for government benefits?
A special needs trust (sometimes also called a supplemental needs trust) can be a way to bridge that gap. A special needs trust is a vehicle by which a prospective donor – typically a parent or grandparent – can set aside money (or other assets) in advance to meet the future needs of their disabled child without jeopardizing that disabled child’s ability to qualify for means-tested public benefits, either now or in the future.
One of the most important aspects of a special needs trust is the level of discretion given to the trustee. In order for entrusted assets not to be considered “available” to the beneficiary (and therefore counted toward the beneficiary’s eligibility for various means-tested government benefits), the trust agreement must give the trustee broad discretion to make (or not make) distributions benefitting the beneficiary. If the standard for distributing trust funds (as set forth in the trust agreement) gives the beneficiary a legally discernible right to the entrusted funds, such that the beneficiary could enforce that right, then the funds will be considered available to the beneficiary.
It is also important that the trustee be directed not to make distributions directly to the disabled beneficiary, but instead to benefit the beneficiary indirectly by disbursing trust funds to those providing services to the beneficiary. The reason distributions should not be made directly to a disabled beneficiary is because funds in the beneficiary’s possession will be counted for purposes of determining his or her eligibility for government benefits. As the thresholds to qualify for government benefits, such as Supplemental Security Income (“SSI”) and Medicaid (also called “Medical Assistance” in Pennsylvania) are quite low, the need to keep money out of the beneficiary’s hands is crucial.
Another crucial consideration is whom to designate as trustee. The person creating the trust (also known as the “settlor” or “grantor”) will often prefer to designate a family member as trustee. The desire to name a family member (such as a sibling) as trustee is frequently based on a belief that a family member will be more closely attuned to the beneficiary’s needs and will therefore better advance his or her interest.
While that may sometimes be true, there are also other countervailing considerations. Special needs trusts are relatively sophisticated and are therefore more difficult to administer than certain other types of trusts. A trustee should be knowledgeable not only of fiduciary duties and tax reporting responsibilities applicable to all trustees, but also of certain restrictions specific to special needs trusts, such as the rules governing various means-tested government benefit programs.
For that reason, settlors may also want to consider naming an institutional trustee. However, not all institutional trustees are interested in administering special needs trusts. Fortunately, there are non-profit organizations, such as Achieva Family Trust, devoted to servicing the needs of disabled persons that are able and willing to serve as trustee of such trusts. Because of their detailed knowledge of and familiarity with the rules applicable to need-based benefits, such organizations are often attractive candidates.
As with so many other things, advanced planning typically yields better results. A special needs trust is a tool that can be used to facilitate proper planning for the needs of a disabled individual, particularly if the disabled person is expected to need resource-limited public benefits during his or her lifetime.
Jeff Scibetta focuses his practice on elder law planning, complex estate planning and administration, business planning, succession planning, tax planning, and real estate. He has spoken to a variety of groups and professionals about elder law matters.