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It is very important to consider the life situation of every person that is on your inheritance list. The right way to transfer assets to one loved one may not be appropriate for the next. With this in mind, a person with special needs is in a very unique position from an estate planning perspective.
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Everyone needs health insurance, but obviously, it is absolutely essential for people with disabilities that will need lifelong care that can be extremely expensive. The majority of Americans get their health care coverage through their jobs, but a significant percentage of people with disabilities cannot work.
Paying for health care insurance out-of-pocket is simply not an option for most, but fortunately, a safety net exists in the form of the Medicaid program. People with disabilities typically rely on Medicaid as a source of health insurance, so a loss of this benefit would be devastating.
Since Medicaid is a need-based program, eligibility is determined based on the financial profile of an applicant. When approval has been granted, it is not necessarily permanent. An improvement in financial status could trigger a loss of Medicaid eligibility.
We should point out the fact that there is another need-based government program that is important for many individuals with disabilities called Supplemental Security Income (SSI). The purpose of this benefit is rather self-explanatory; it is a source of income for people with little to no personal earning power.
Once again, if a person that is eligible for SSI was to come into money for some reason, they could be disqualified.
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Instead of leaving a loved one that is relying on these programs a direct inheritance, you could fund a supplemental needs or special needs trust. The individual in question would be the beneficiary, and you would name a person or entity to act as a trustee. There are professionals that offer trust administration services, and this can be the right choice for many families.
As long as the program rules are followed to the letter, the trustee would be allowed to use assets in the trust to make the beneficiary more comfortable in many different ways. This being stated, the beneficiary would not have the ability to directly access assets that been conveyed into the trust.
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Technically, this is possible, and need-based government benefit recipients sometimes come into money through personal injury settlements as well. A parent, a grandparent, or a legal representative could use these assets to establish a trust on behalf of the disabled individual. This would be called a first party or self-settled special needs trust.
That’s the good news, but the bad news follows in the form of Medicaid estate recovery. Assets that remain in the trust after the death of the beneficiary could be absorbed by Medicaid during reimbursement efforts.
Conversely, when a special needs trust is established and funded by someone other than the beneficiary, it is a third-party trust. In the trust declaration, the grantor would name a secondary or contingency beneficiary to assume ownership of any remainder that is left in the trust after the death of the primary beneficiary. Medicaid would not be able to touch these assets.
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Parenting a child with special needs be financially, emotionally, and physically challenging. It can also make a parent feel isolated and alone. It may help to know how many other Americans are navigating similar issues as evidenced by the following facts and figures:
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- Nearly one-fifth of all Americans have a physical, sensory, or intellectual disability, according to the National Organization on Disability.
- One in every 26 American families reported raising children with a disability
- More than 41 million Americans, or almost 15% of the population age 5 and older, have some type of disability.
- Out of 72.3 million families included in the US Census Bureau Report, about 2 in every 7 reported having at least one member with a disability
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A child with special needs can look forward to living a much more independent life as an adult than would have been possible several decades ago; however, your child may continue to depend on specialized medical and/or therapeutic care when he/she reaches adulthood. If you have the financial resources to continue helping your child as an adult, you may want to do so. The problem is that giving your child money, or other assets, could jeopardize his/her eligibility for assistance programs such as Medicaid and Supplemental Security Income (SSI). A special needs planning component incorporated into your estate plan can prevent that from happening.
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State and federal assistance programs often provide crucial services to children and adults with special needs. These programs, however, have both income and asset limits that apply to eligibility. Once your child is legally considered an adult any financial help you offer will count against those limits, potentially causing your child to lose important benefits. That includes financial help while you are alive as well as direct gifts made to your child in your estate plan.
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Special needs planning makes it possible for you to continue to contribute to your child during your lifetime and after you are gone while also considering the need for continued eligibility for assistance programs. A common estate planning tool used within a special needs planning component is a specialized trust known as a “special needs trust.”
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A special needs trust, also referred to as a “supplemental” needs trust, or “SNT,” is a specialized irrevocable living trust that allows you to continue to provide for your child without jeopardizing his/her eligibility for assistance. Assets held in an SNT are used to “supplemental” the care and maintenance provided by assistance programs without affecting your child’s eligibility for the programs. Very specific language must be used when creating an SNT to ensure that it is recognized as such by state and federal assistance programs.
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The purpose of an SNT is to allow loved ones to provide “supplemental” assistance to someone who depends on assistance from programs such as Medicaid and SSI. Therefore, assets held in an SNT can only be used to purchase extras such as a vehicle, a vacation, or furniture that is not provided by any of the government assistance programs.
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A first-party, or self-settled, special needs trust is established using assets owned by the person with special needs. It must be established by the parent, grandparent, or guardian of the child with special needs, or by a court. This type of special needs trust is most frequently needed when a child with special needs receives a lump sum of money as a settlement for injuries in a lawsuit. The lump sum would likely disqualify the beneficiary from eligibility for assistance from Medicaid, SSI, and other state and federal assistance programs.
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This type of SNT is established by a third party, such as a parent or grandparent, using assets owned by the third party. The assets are intended to be used for the benefit of a person with special needs. This type of trust must include specific language and must be worded such that the assets in the trust are distributed to a third party, such as the parent, to be used for the benefit of the individual with special needs.
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We are here to help if you would like to learn more about special needs planning or any other estate planning matter. To request a consultation appointment, send us a quick message or give us a call at 802-879-7133 in Vermont.
