October is National Special Needs Month - A Discussion on Special Needs Trusts
By Don Drake, Connelly Law Offices, Ltd.
"Throughout the month, special needs planning attorneys from all corners of the country come together to raise awareness of the crucial legal needs of individuals with special needs, their families, and caregivers," stated professional fiduciary and certified elder law Attorney RJ Connelly III. "Special needs planning encompasses a range of essential services such as special needs trusts, care management, advocacy to preserve educational or civil rights, and public benefits like Supplemental Security Income and Medicaid, among others."
"The reality is that families with a special needs member make up a significant portion of the population, with one in every ten families in the United States having a child or loved one with special needs," continued Attorney Connelly. "This growing societal issue is not unique to any individual or family. Despite government assistance, the cost of caring for a family member with disabilities often surpasses the aid provided, making it a pressing concern for many families. This is why it is critical to ensure that those with special needs receive the necessary support and advocacy to help them thrive."
At Connelly Law, we understand the unique challenges that come with planning for individuals with special needs. That's why we have a dedicated practice area that focuses solely on helping families navigate the complexities of special needs planning. We take the time to work closely with our clients to ensure they have a thorough understanding of all the key planning considerations needed to protect their loved ones with special needs.
From setting up a special needs trust to coordinating government benefits and services, we provide comprehensive support and guidance to help families make informed decisions and plan for the future. Our goal is to empower families to take control of their situation and ensure their loved ones receive the best possible care and support. Let's begin today's discussion by looking at the Special Needs Trust.
The Special Needs Trust
"Today, we want to delve deeper into the ways to fund this crucial tool," said Attorney Connelly. "A special needs trust is an irrevocable trust that can provide benefits to minors or individuals who have physical or mental challenges. The purpose of these trusts is to ensure that beneficiaries receive their benefits without being disqualified from government aid programs like Medicaid or Supplemental Security Income (SSI)."
Attorney Connelly also spoke about the various types of disabilities the firm deals with. Some individuals are competent enough to take care of themselves and even live independently. In such cases, they work closely with them to provide assistance when needed. However, there are those with disabilities that are entirely debilitating. For these individuals, the team works with families or providers to determine the best way to help them live a full and dignified life.
"There are many restrictions on what can be paid for with these trusts," pointed out Attorney Connelly. "For example, the trust cannot pay for food or shelter, and money cannot be given directly to the beneficiary. However, it can fund quality-of-life items such as cell phones, televisions, computers, and other everyday items that most of us take for granted."
To achieve the purpose of special needs trusts, it is essential to explore ways to fund them adequately. Attorney Connelly suggested diverse options, including personal savings, gifts or inheritance, life insurance policies, and settlement or verdict proceeds from personal injury lawsuits. Each of these funding options has its pros and cons, and it is necessary to consult with a professional to determine the best approach. With proper funding, special needs trusts can help individuals living with disabilities to live a life of dignity and provide them with the necessary support to thrive.
Funding the Trust
Families looking to establish special needs trusts have unique funding options available to them, as each family situation requires a tailored approach. For instance, a first-party special needs trust can be funded with money obtained from a personal injury settlement provided the beneficiary is under 65 years old or any inheritance received directly. However, it's essential to note that these trusts have pay-back provisions for Medicaid upon the death of the disabled individual. On the other hand, a third-party special needs trust can be created either during the creator's lifetime (inter vivos) or as a testamentary trust that becomes accessible upon the creator's death.
According to Attorney Connelly, an inter vivos trust enables family members or friends to contribute to the trust before the creator's death, providing them with an opportunity to enhance the beneficiary's quality of life. Third-party special needs trusts are typically funded with inheritances, family savings, and other financial gifts, which are invested in stocks or bonds for growth and hedging against inflation. With proper investment decisions, the trust can become self-sustaining, providing financial security for the beneficiary's future.
Using Insurance Products
Attorney Connelly emphasized the importance of carefully reviewing and considering the available insurance products when deciding on the most suitable option to fund a Special Needs Trust (SNT). Multiple insurance products can be used to fund an SNT, and each one has its unique features and benefits that must be examined in detail. During the decision-making process, it is crucial to take a close look at each option to ensure that it aligns with the individual's specific needs and circumstances.
Using Real Estate
According to Attorney Connelly, a family home can provide a sense of stability and routine for individuals with special needs, making it a valuable asset to them. However, transferring the house in the name of your special needs loved one can have a significant impact on means-tested government benefits they receive. In such cases, it is often wise to place the property in a third-party Special Needs Trust (SNT) to avoid the Medicaid lien of a first-party trust upon their death and transfer to other beneficiaries instead.
If the special needs individual needs to relocate and sell the home, the sale proceeds will remain in the trust. Alternatively, if moving is not contingent on selling the home, the SNT trustee can convert the property to a rental, generating a steady stream of income for the trust. In either scenario, it is crucial to ensure that the trust has enough funds to maintain the family home in the SNT. Investing in the upkeep of the residence can help preserve its value and provide a familiar and comfortable environment for the individual with special needs.
Attorney Connelly has noted that funding a special needs trust (SNT) through retirement plans is a complex and challenging process that requires careful fiscal management. Improper handling of the distribution of trust funds may result in the taxation of all funds transferred to the beneficiary during the transfer year. Consequently, this situation may lead to disqualification for government benefits and unnecessarily high taxes.
However, Attorney Connelly has indicated that an exception to this rule is designating military survivor benefits to a special needs trust, which has recently been adopted through the Disabled Military Child Protection Act federal legislation. Nonetheless, funding SNTs from non-military retirement accounts requires that the SNT format should be an 'accumulation trust' that spaces out required minimum distributions. Furthermore, any remainder beneficiaries entitled to remaining funds upon the death of the primary beneficiary should ideally be younger than the primary beneficiary to avoid unintended distribution requirements.
Attorney Connelly has also highlighted that retirement accounts can negatively affect the goal of an SNT. To mitigate this, they encourage draw downs on the retirement account to purchase life insurance for the SNT or leave the retirement funds to other heirs. It is, therefore, essential to have a well-planned strategy to fund SNTs to avoid any negative implications.
Get Professional Advice
"Caring for special needs family members requires a unique set of considerations and attention and they deserve the same level of love, care, and support as any other family member, but the care provided must often be more comprehensive and specialized," said Attorney Connelly. "Due to the nature of their disabilities or conditions, it is necessary to plan and allocate specific resources in order to ensure that their needs are properly met. This can be a complex and daunting task for many families, but our experienced staff are well-versed in the unique challenges of special needs planning. With our guidance, you can avoid costly mistakes and ensure your loved ones receive the care and support they require."