Protecting Loved Ones with a Special Needs Trust

When a loved one has a unique obstacle to wellness, in the form of an illness, disability, learning disorder, addiction, or mental health issue, estate planning is essential to your legacy of loving and caring. For the millions of Americans* affected – your heirs and mine – we need to design estate plans with the unique needs of the individual with a special need or disability in mind.

*The statistics of the numbers of persons with a form of disability, many who need help managing their affairs may surprise you. It did me. Here are some stats in the areas of disabilities generally, mental health, addiction, and learning disabilities. It’s no wonder that the fields of elder law and special needs law have grown tremendously.

Planning for individuals who need strong guidance and for those who may be receiving public benefits is nothing new. What’s different today from even 30 years ago is that individuals who have so-called “special needs” are often living independently, working and making money, and may be mostly capable of caring for themselves – or not. Special Needs Trust Attorneys and elder law have addressed all of the nuances in protection and care around disabilities and illnesses for the special needs individuals of today.  

What is a Special Needs Trust?

Trusts have been utilized for the purpose of protecting assets and promoting wellness from time immemorial. The Special Needs Trust (or Supplemental Needs Trust) is the tool of choice when it comes to leaving funds for the support of an individual with an illness or disability, following a well-settled body of law. There are 2 ways to fund Special Needs Trusts, one uses your funds for their behalf, and the other uses their own funds that they have earned.

Special Needs Trust Funded by you 

The flexibility of the Special Needs Trust to both manage and distribute assets carefully over time is a plus over other arrangements like joint accounts and informal grants of money to other family members. Such arrangements often fail because they are subject to graft or abuse, or the loss of the assets to a creditor or divorce or in the estate of the caregiver because the money is not legally recognized as separate from the caretaker’s own money.

What about your existing estate planning trust? The problem with typical trusts with liberal distribution standards is that they do not protect the individual against the loss of government benefits, or against themselves.

The Special Needs Trust (also called a Supplemental Needs Trust when funded by a third party) charges the trustee to distribute assets for “any purpose” in their discretion, or perhaps to limit distributions to supplement what the individual otherwise has in the way of benefits, so that they do not lose their government support. Whether a trust can provide for a benefit like housing without causing the loss to the individual of other benefits may be a component of the planning. Sometimes, the best plan is one that simply distributes a regular, modest payment like a lifelong pension. This benefit can be turned off or turned down if it jeopardizes a government benefit.

Special Needs Trust Funded by Them

When the individual possesses money that they have earned, been gifted, or received as a personal injury award, there are other planning choices with trusts as well. These Special Needs Trusts are a different breed of trust from the ones you set up with your money for the individual. These so-called self-settled, first-party, or d4a trusts**. The special needs trust rules specify that you must name the state providing the benefits as the beneficiary to be repaid for those benefits. A first-party trust can be set up either by individuals themselves or by a guardian, parent, or a court for their benefit, prior to age 65.

** The federal Health and Human Services code allows the protection of self-settled or first-party trusts under 42 USC 1396p(d)(4)(a).

The law of many states specifically permits inheritances to be put into such trusts after the fact whether or not the protection was provided for under the will or trust of the benefactor. Despite the existence of laws intended to help protect the individual’s own money or inheritance, we would rather benefactors design trusts ahead of time to gain the flexibility of the Special Needs Trust.

The Care Plan 

Many beneficiaries will need a care plan. The plan may be outlined in advance or may be required to be prepared at the time of the funding of the trust. The trust can pay for the plan created in collaboration between the individual, family and professionals, and pay for suitable caregivers and resources such as educational, occupational and other therapy, and counseling. The trustee approves expenditures for the plan while others carry out the care. Cooperation of the individual is assumed, but, as in an addiction case, it may be up to the trustee to determine whether an individual has remained sober. The trustee can hire the services needed to make this determination prior to distributions.

The Trustee

The trustee can be another family member, however, increasingly parents realize that individuals are more likely to preserve their relationships with siblings if one of them does not control the purse strings. Instead, an independent trusteeSpecifically in relation to the trust Grantor, the IRS effectively defines the term for what it is not: a person who is not a related or subordinate party. Read More can be appointed. The independent trusteeSpecifically in relation to the trust Grantor, the IRS effectively defines the term for what it is not: a person who is not a related or subordinate party. Read More can be told to rely on family to help guide the care plan, the sober plan, or specific trust distributions, while the trustee makes final decisions and supervises investment management to make the money last or grow.

Independent professional and corporate trustees may be hard to come by because of the specialized skill desired for this field, and because the sums of money may not be large enough to satisfy requirements for a bank trust department being involved. Therefore, it is not uncommon for law firms and private professional trustees to be engaged given they have developed expertise in the area.

Our sister trustee services firm, Northeast Private Trustees, LTD., serves in this capacity supporting our compassionate and skilled lawyers and trust officers.