special needs trust Special Needs Planning

When your loved one receives needs-based governmental benefits, a traditional estate planning technique does not work very often. If you make outright distributions of your assets to a child who receives SSI/Medicaid benefits by a will or in a trust, the child’s SSI/Medicaid might be terminated. If you leave assets to your healthy child hoping that the healthy child will take care of the disabled child with the assets, the assets might be taken by the healthy child’s divorcing spouse during the property settlement procedure. The healthy child might be involved in a personal injury lawsuit (most likely car accidents) and the entire assets that you leave to the healthy child for the benefit of the disabled child might be attached by the plaintiff in a lawsuit against your healthy child. Or the assets might be in the hands of the healthy child’s bankruptcy trustee to be distributed to the healthy child’s creditors. All these factors must be carefully reviewed before you establish your estate plan when your loved one receives government needs-based benefits. You do not know if your loved one will ever be disabled after you die. Then you might want to establish a stand-by special needs plan in your estate planning documents. Also, you cannot rely on government benefits to take care of your special needs beneficiary for the rest of his/her life due to the uncertainty of the economic future in this country. It is possible that the government might reduce the amount of money spent for needs-based health programs in the future.

Estate Planning When Your Spouse Qualified Medicaid

When a spouse qualifies for Medicaid, the healthy spouse must make sure that they establish a Will-based estate plan and include a 3rd party Special Needs Trust for the benefit of the spouse on Medicaid. Otherwise, the spouse who is on Medicaid is likely to be deprived of Medicaid benefits. If you have a trust-based estate plan, you might want to immediately switch to a will-based estate plan with a Special Needs Trust in the will as soon as Medicaid becomes an issue for your spouse. This is so that your ill spouse will not be deprived of Medicaid or SSI. Also, the Special Needs Trust that you establish in your will for your spouse will not be subject to claim or lien by the State even after the death of your ill spouse. Instead, the assets in the Special Needs Trust will be distributed to your remainder beneficiaries (usually children) after your spouse’s death.

You can establish your estate plan with special needs planning and be assured that your loved one will be taken care of after your death. Even if there are needs-based government benefits for disabled people, the support that your beneficiary will receive from these programs is minimal. By establishing a Special Needs Trust (SNT), your loved one will be able to enjoy his/her favorite restaurant meals, computer games, taking trips, etc, that government programs can never provide.

Special Needs Trust

The purpose of the Special Needs Trust is not merely to secure government benefits eligibility but mostly to give the trustee of the Special Needs Trust discretion to enhance the quality of the beneficiary’s life. A Special Needs Trust can allow a person with disabilities to receive government benefits and still have a source of funds to pay for extras that government programs do not provide because distributions from a Special Needs Trust are to supplement but not replace the benefits that a special needs beneficiary receives from SSI, Medicaid, and other needs-based government programs.

The Special Needs Trust must be drafted so that the distribution based upon the trust terms would comply with the very complicated SSI or Medicaid rules and that the beneficiary’s eligibility to these government programs would not be negatively affected. The trustee of the Special Needs Trust must distribute the trust assets for the benefit of the special needs beneficiary under the trust terms. For example, the assets in the Special Needs Trust are considered “non-countable assets” for SSI and Medicaid eligibility purposes. However, if the trustee distribute cash to the special needs beneficiary directly, this cash payment will be considered income to the beneficiary and will reduce or possibly eliminate the beneficiary’s SSI and Medicaid eligibility.

Two Basic Kinds of Special Needs Trust

1. Self-Settled Special Needs Trust: A self-settled Trust is funded with the disabled person’s own assets. For example, a person who becomes disabled due to a car accident might put the litigation settlement proceeds in the Self-Settled Trust. There are three requirements for this type of trust: 1) it must be irrevocable; 2) it must be created by a parent, grandparent, legal guardian, or a court; 3) it must include a “pay back” provision, which means that after the beneficiary’s death, any funds remaining in the trust must go to the State for the amount the State paid for the Medicaid recipient.

2. Third Party Special Needs Trust: A Third Party Special Needs Trust contains assets of someone else other than the disabled beneficiary. For example, a parent establishes a Third Party Special Needs Trust for his/her disabled child, or a spouse establishes a Third Party Special Needs Trust for the spouse who is on Medicaid, although this spousal Third Party Special Needs Trust must be established by a Will. For this type of Special Needs Trust, the trust assets will not go to the State after the disabled beneficiary’s death, but instead the remaining assets can be distributed to the remainder beneficiaries without a reach of the State. Therefore, there is no need to put a “pay back” provision in the trust agreement.

Thus, it is always better if you can establish a Third Party Special Needs Trust for your beneficiary than making outright distributions to your disabled beneficiary. If you make an outright distribution to your disabled loved one, that will negatively affect the beneficiary’s government benefits programs and that will necessitate the beneficiary to initiate a legal proceeding to establish a Self-Settled Special Needs Trust by a court (before the beneficiary’s 65th birthday) and the remaining assets in the trust will go to the State after the disabled beneficiary’s death. I recommend that you establish a Third Party Special Needs Trust and avoid State’s right to reimbursement for the cost of care after the beneficiary’s death. Instead, the remaining assets can go to your other beneficiaries with a proper Special Needs Planning in your estate plan.

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category: Estate Planning, Medicaid Planning

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