By: Anne M. Hamilton
According to Congressional Research Service, some 43 million Americans have one or more physical or mental disabilities. Many of the individuals are or will receive means tested public benefits such as SSI, Medicaid, Section 8 housing, and benefits under federal and state programs.
A critical piece to ensuring eligibility or continuing receipt of benefits is an estate plan which addresses how an individual with special needs inherits from his or her parents or loved ones. Many of the public benefits available to individuals with disabilities are only available if the individual’s income and assets are below a fixed limit. Special needs trusts enable disabled individuals to receive inheritances, equitable distributions, alimony, child support, and personal injury settlements while maintaining these public benefits.
There are both financial and personal issues with respect to estate planning for parents of an individual with a disability. Personal issues such as guardianship, living situations, and challenges particular to the specific type of disability must be discussed and planned for in the estate planning documents. Financial concerns include determining how much money should be available to meet the financial needs of the disabled individuals, and how to meet those needs while maintaining public benefits. Often this is done through a special needs trust.
There are several types of special needs trusts. For individuals other than the disabled individual, a typical special needs trust is structured as a third party special needs trust. A third party special needs trust can be revocable and funded during the third party’s lifetime or it can be testamentary and funded at the death of the third party.
A self-settled or first party special needs trust is a trust that is funded with the disabled individuals assets, often from a gift or court settlement. One important element distinguishing the self-settled from third party special needs trust is the payback clause. A self-settled special needs trust is required to contain language allowing the government to retrieve whatever assets remain in the trust at the death of the disabled individual. This is not true of a third-party trust.
Another type of special needs trust is a pooled trust. This type of trust allows parents or loved ones with limited assets to direct assets to a pooled trust that holds the assets, along with the assets of other donors. A pooled trust is often administered by a non-profit organization.
Funds in a special needs trust can be used to pay for things such as medical expenses not covered by SSI and Medicaid to vacations and entertainment as long as the expenditure benefits the named beneficiary. All expenditures from the trust are reviewed by Medicaid and SSI to determine the appropriateness of the distribution.
There are many facets to an estate plan that serve to address the care of a special needs child. Estate planning documents tailored to your individual circumstances that build in as much flexibility as possible while complying with federal and state law can ensure the intended care for your child or loved one is provided after your death.