Planning for Care After Your Death
While a child brings so much joy to your life, a child also comes with serious and complex financial concerns. This is especially true with a special needs child where the costs of necessary medical care may be significant. In order to offset out-of-pocket costs and reduce the financial burden on the family, it is imperative to find and utilize programs and benefits that are offered to individuals with disabilities.
Qualifying for programs and benefits can be tricky. One of the most common and valuable programs for special needs children is Medicaid, a government medical program. Subject to some narrow exceptions, the program imposes an asset cap of just $2,000. If the special needs child has assets in excess of the cap, the child will be ineligible. The asset cap makes it difficult to gift or leave an inheritance directly to a special needs child. This is not just an issue for the parents of the special needs child, but also for anyone that wants to financially provide for the child.
Parents of a special needs child are often aware of the asset cap, but are not aware of how to work around it and still provide for the child after death. The initial and understandable reaction to the asset cap is to leave assets at death to another relative with the expectation that the relative will use the funds for the child. However, this is a risky strategy. There is no way to mandate that the funds be used solely for the benefit of the child. The funds are at risk of the relative’s creditors, including ex-spouses, bankruptcy, and lawsuits. If the relative dies and does not have an estate plan in place to direct otherwise, the funds will likely end up with beneficiaries other than the child. Also, this type of arrangement can create unintended and negative tax consequences for the relative. Fortunately, there are solutions with proper planning.
How Do You Plan Correctly?
A Supplemental Needs Trust is often one of the key solutions. The primary purpose of a Supplemental Needs Trust, also known as a Special Needs Trust, is to provide for a special needs child while maintaining the eligibility of the child for valuable government needs-based benefits. The expectation is that government benefits, such as Medicaid, will be the primary source of support for the child and that the Supplemental Needs Trust will be used to supplement that support and provide for needs of the child that the government benefits do not cover. Supplemental needs are broad and could include education, travel, recreation, and dental care. A properly-structured Supplemental Needs Trust will not be considered an available resource of the special needs child. As a result, the assets of the Supplemental Needs Trust are not counted towards the child’s asset cap.
Supplemental Needs Trusts fall into two primary categories, Self-Settled Special Needs Trusts and Third-Party Supplemental Needs Trusts. A Self-Settled Special Needs Trust is generally created to hold a large settlement payment received by a disabled person. When you are planning to leave funds for a special needs child, you will use a Third-Party Supplemental Needs Trusts.
The Third-Party Supplemental Needs Trust can be created and funded by anyone other than the special needs child. The trust can be created and funded by parents, grandparents, siblings, aunts, uncles, or any combination. The trust can be created and funded by gifts made during life. However, most Third-Party Supplemental Needs Trusts are created and funded upon death. The creation and funding mechanism is usually a last will and testament or a revocable trust. A revocable trust is another type of trust created during life with the primary purpose of enacting distributions at death without involvement of a probate court.
A Third-Party Supplemental Needs Trust grants the appointed trustee absolute discretion to distribute trust assets for the child’s needs, subject to the restriction that distributions cannot be made for needs that would otherwise be covered by a benefit for which the child qualifies. The trustee can essentially be anyone other than the child. However, most parents use a professional and independent fiduciary like Creative Planning Trust Company, LLC to serve as trustee. Upon the child’s death, the remaining trust assets do not have to reimburse the programs from which the child received benefits during life. The remaining trust assets can be distributed to whomever the person creating the trust designated.
Advantages of Using A Supplemental Need Trust:
- Provides a mechanism to leave assets for the benefit of a special needs child without jeopardizing the child’s eligibility for valuable needs-based assistance;
- Allows you to choose the party, the trustee, who will manage the trust assets for a special needs child’s care;
- Provides protection for a special needs child against financial predators; and
- Allows you to direct where the remaining assets will go upon a special needs child’s death.
Disadvantages of Using a Supplemental Needs Trust:
- The appointed trustee will have complete control over distributions to the special needs child;
- Establishing the trust will incur legal fees; and
- There will be some ongoing costs and tasks to administer and maintain the trust.
A Supplemental Needs Trust is often an excellent option to ensure that a special needs child is provided for without jeopardizing his or her needs-based benefits. However, a Supplemental Needs Trust must be structured correctly and it is imperative to develop it with assistance from your trusted advisors.
Christina M. Knopke, JD
This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.