The Special Needs Trust

Ten Tips to Consider for Special Needs Planning

by Don Drake, Connelly Law Offices, Ltd.

Connelly Law Offices, Ltd. "Southern New England's Elder Law Attorney"
Attorney RJ Connelly III

"October is National Special Needs Law Month. As I stated in our last blog, special needs planning can involve special needs trusts, care management, advocacy to preserve educational or civil rights, public benefits such as Supplemental Security Income (SSI) and Medicaid, and many other critical issues affecting families and those with special needs," said certified elder law Attorney RJ Connelly III. "What is extremely important to know is that well-meaning family members could inadvertently make a mistake when trying to provide for the special needs child that could disqualify them from all future government benefits, and this could be catastrophic. I have seen this happen and it's heartbreaking. Education and consulting with a professional are the best ways to ensure the child will not lose the help they need. I want to touch on this in today's blog."

"...well-meaning family members could inadvertently make a mistake when trying to provide for the special needs child that could disqualify them from all future government benefits, and this could be catastrophic." --- Attorney RJ Connelly III

Sara's Story

Sara was a young woman but had her share of emotional heartbreak and medical issues. In her mid-thirties, she was diagnosed with multiple sclerosis (MS), which changed her life drastically. This diagnosis resulted in a lost managerial position at a social service agency, being forced to sell her house, and going through a breakup with a partner after a decade-long relationship. "I knew the financial problems were coming as I was the person earning the most money in our relationship, but the breakup was a shock out of the blue," stated Sara. "I'm not sure if things went bad because of the MS or we just grew apart, but the bottom line was that I was alone, and the stress caused the MS to flare up to a point where I needed help -- and a lot of it."

Special Needs Trusts - Connelly Law Offices, Ltd.
MS does not discriminate

Multiple sclerosis can be a crippling disease as it affects the brain and the spinal cord. During this illness, the person's own immune system attacks the myelin, the protective sheath that covers the nerve fibers which causes a disruption in the communications between the brain and the body. Eventually, this disease can cause permanent damage and severe nerve deterioration. For some, this may manifest by losing the ability to walk, for others, they may experience extended periods of remission without any new symptoms appearing. Unfortunately, there is no cure for MS; treatment consists of addressing the symptoms as they appear.

The MS had taken Sara's mobility away, making her reliant on daily assistance from an outside vendor who provided her with a personal care attendant. Her father had died long before Sara was diagnosed, and her mother had recently been found to have a serious heart condition. Her mother and late father had a will in which a generous sum of money and property assets were scheduled to go to Sara. With the MS diagnosis and the need for outside assistance, Sara felt that her parents had provided for her until she realized how much the cost of the help she needed would be and she then panicked.

"I was so thankful for my parents and what they had put away for me, but I had no idea that the healthcare would cost so much, and that my insurance would not pay for all of it. I was still a young adult by today's standards and any money and assets I would inherit would be spent in just a few years. I spoke to a healthcare advocate who referred me to Connelly Law Offices for help. That's when I learned about the Special Needs Trust," said Sara.

Connelly Law Offices, Ltd. Special Needs Trusts
Attorney Connelly speaking about special needs

A Special Needs Trust (SNT) allows a parent, or a guardian of a disabled loved one with a disability to put in place a Trust for the long-term care of that individual. Using this Trust tool, the money placed in it does not impact the child's eligibility for the outside care needed that provides support for those with disabilities.

"I remember sitting with Sara and her mother as we drafted the Trust and we explored what was possible under the guidelines of the Trust," said Attorney Connelly. "Both were crying when we finished; Sara, because she knew she could remain independent longer than she thought without losing her personal care attendant that she had and her mother knowing that after she was gone, her daughter would be taken care of."

Ten Tips Regarding a Special Needs Trust

"In our blog today, I want to discuss ten important things to consider when developing an SNT," stated Attorney Connelly. "Careful planning for the future of a loved one with special needs is one of the most critical life-protecting tasks you will ever provide for them, and I cannot emphasize this enough. The tips I will present today can be employed as a part of a meaningful and comprehensive planning process addressing the many of the challenges of special needs family members without negatively influencing eligibility for government programs or other loved ones you are providing for in your estate plan." With that, let's list Attorney Connelly's ten tips.

  • Carefully Review How Assets Are Divided - Nothing requires you to treat each loved one equally. Consider the potential needs of your loved ones and provide for them according to their needs. Typically, this means that a child with special needs who requires more assistance throughout their lifetime will have greater support to live as normal a life as possible. It's important that this is explained to the other children who are blessed with good health and can lead self-sufficient, productive lives without an equal inheritance.

  • Do Not Disinherit a Special Needs Child - Disinheriting a special needs child may protect their eligibility for government benefits like Supplemental Security Income (SSI), Medicaid, and Section 8 housing because these benefits are means-tested programs with strict asset and income limits. Although it sounds like a simple solution, you need to explore other options. More sophisticated legal entities like a special needs trust can meet certain discretionary spending needs without interfering in public benefits programs. Our office can provide options for such a situation and help design a plan that works best for your needs and situation.

  • Choose the Proper Trustee - The trustee will need “sole and absolute” discretion, a standard legal requirement when determining beneficiary eligibility for SSI or Medicaid. What seems a natural choice, having an adult sibling as successor trustee may cause a conflict that will negatively affect the future of your special needs child. Other options include: 1) Name an attorney or financial institution as a professional trustee or co-trustee (read last week's blog regarding the problems that can occur with family members being the trustee of special needs trust when the recipient is a substance abuser). 2) Providing the trustee authority to delegate specific tasks to a professional representative to receive additional expertise in areas that may be needed. 3) If you name a family member also designate a Trust advisor for assistance with investment decisions. This can maximize the money in the Trust. 4) Appoint a trust protector with the authority to remove the trustee if they are acting out of self-interest and replace them with a corporate trustee.

These are things that we will explore together when developing the SNT.

  • Understand the Rules Both Local and Federal - How you allocate taxes and expenses among inheritors needs consideration. If you create a special needs trust during your life or upon your death, specify if your estate taxes apply to the trust, will receive charges against that trust, or be allocated between the remaining shares. Requiring a special needs trust to pay some of your estate taxes reduces funds available to your special needs loved one. Again, it's important that you use someone that understands these types of Trusts and the rules of the state you live in.

  • What if You are Incapacitated - Include a provision in the durable financial power of attorney that allows your agent to make non-support, discretionary distributions for your special needs child’s benefit allowing the agent the appropriate legal authority to establish and fund a trust for this child. Also, you may also want to authorize this agent to create a “sole benefit trust” for your special needs child in case you require nursing home care. Transfers to this trust type may assist in a parent’s eligibility qualification for Medicaid while preserving assets held in trust for the child.

  • Carefully Review Beneficiaries and Asset Titling - Make sure that assets do not inadvertently pass directly to your special needs child. A mistake like this could result in disqualification from government benefits.

  • Funding a Special Needs Trust with Life Insurance - A policy type known as second-to-die pay after both parents’ death is useful when a special needs trust is a named beneficiary. Consult with Connelly Law Offices before purchasing a life insurance policy for such a purpose. Again, you want to ensure that anything you do will not result in disqualification from government benefits.

  • Using IRAs and Retirement Plans may not be effective - These financial entity types have required minimum distributions that can negatively impact public benefits mean-testing (the government benefits). Funding a special needs trust using retirement benefits could trigger the income tax liability in total and upfront, reducing the net amount of support for the child. Again, advance planning is needed and an attorney with knowledge of such drawbacks should be consulted.

  • Have a Letter of Intent (LOI) - Such a letter gives you the opportunity to personalize your hopes and dreams and describe the daily routines of your child’s life and with whom they interact. The letter of intent is extremely important for a non-parental trustee or new caregiver. Information about the child’s unique needs and preferences, functional abilities, interests, routines, and critical medical information characterize how your child can live their best life. At Connelly Law, we know you would want nothing less.

  • Sit With Others in the Family and Plan - Some well-meaning family members may want to name your special needs child as a beneficiary of their estate, which could negatively impact the plans for the child. To preserve all means-tested benefits available, all inheritances to the child should become part of the special needs trust. There is another option, however, and that is to create a third-party SNT. A third-party trust can receive bequests, gifts, and inheritances efficiently and cost-effectively without requiring the creation of multiple SNTs. Again, an attorney with experience and knowledge of such trusts should be consulted to avoid catastrophic mistakes.

"It may even become necessary for your special needs child to have their own estate plan," said Attorney Connelly. "Depending on their capacity, a simple will and other basic documents like a durable general power of attorney, health care directive, and HIPAA release for their medical records may be of great benefit to them. Also, creating a self-settled SNT for your child’s personal assets may also prove useful. The bottom line is this -- when developing an SNT for a special needs child, make sure to get the assistance of an experienced professional as even the slightest mistake could prove costly."