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The Special Needs Trust

by Richard W. Fee, M.A., M.Ed
National Institute on Life Planning for Persons with Disabilities



Source

National Information Center
for Children and Youth with Disabilities

Contents

Abstract

Overview Of Estate Planning Issues

The Special Needs Trust

The Letter Of Intent

FYI: Information Resources From Nichcy's Database


Forums

Learning and Other Disabilities


Related Articles

Questions Often Asked About Special Education Services



Imagine for a moment that one evening, on your way home from a movie or a dinner party, you and your spouse pass away in an automobile accident. While you were always planning to write a will, you never actually got around to it, so your modest estate, including some life insurance, is distributed by the laws of your state. You have two sons, one with a disability and one without. Each of your sons inherits $100,000.

Your older son, Frank -- who does not have a disability -- uses his inheritance to pay off some of his mortgage and splurge on a new car. In contrast, your younger son Johnny gains nothing and loses much. Johnny, who has multiple disabilities, does not work and relies solely on government benefits for housing and medical care. The inheritance causes Johnny to lose those benefits. He must now provide for his own medical care, which includes the considerable cost of medicine, personal care attendants, physical therapy, and doctor's visits. The group home in which he lives begins to charge him for residency and for the services he receives there. Within two years, all but $2,000 of the inheritance is gone. At this point Johnny again becomes eligible for government benefits and is re-instated after a waiting period of several months -- a period in which he uses up the last of his inheritance. Now there are no funds left to pay for whatever supplemental needs Johnny might have: education, over-the-counter medicines, dental care beyond what is covered by government benefits, trips to see his brother or other family members, reading materials, supplies such as razors, soap, and shampoo. Government benefits do not cover these types of expenses, and Johnny's parents are no longer here to do so. The irony of the situation is that, while an inheritance should ordinarily improve a person's lifestyle, this one has worsened Johnny's.


The Question of Relying on Government Benefits Only

The first question that comes to mind when something like this occurs is one of fairness. Should the government continue to subsidize someone who has "money?" On one hand, the standard government programs such as SSI and Medicaid were established to help persons who are elderly or who are disabled and living at the poverty level. On the other hand, government benefit programs are paid for out of tax dollars, and eligible individuals are entitled to receive these benefits.

When families consider this question, they should be aware that, while the services available through government benefit programs may be substantial (e.g., medical coverage through Medicaid), the actual cash benefits are generally quite small and force the individual to live way below the poverty level. In 1992, the maximum Federal SSI monthly payment was $422 for an individual. This means that, for an individual with a disability to have any type of meaningful lifestyle, the family or local charities have to provide supplemental assistance.

With recent changes in the Social Security Administration, the primary government benefit programs are recognizing that family contributions to the person's well-being can only improve his or her overall quality of life. As long as the family's contributions are supplementary in nature, as opposed to duplicating government benefit programs, they are permitted. Thus, the current government benefit programs do permit the family to provide some supplementary income and resources to the person with a disability. However, the government regulations are very strict, and they are carefully monitored.


Special Needs Trust

The only reliable method of making sure that the inheritance actually has a chance of reaching a person with a disability when he or she needs it is through the legal device known as a Special Needs Trust (SNT). The SNT is developed to manage resources while maintaining the individual's eligibility for public assistance benefits. How is this done? Simply put, the family leaves whatever resources it deems appropriate to the trust. The trust is managed by a trustee on behalf of the person with the disability.

While government agencies recognize special needs trusts, they have imposed some very stringent rules and regulations upon them. This is why it is vital that any family contemplating using a SNT consult an experienced attorney -- not just one who does general estate planning, but one who is very knowledgeable about SNTs and current government benefit programs. One wrong word or phrase can make the difference between an inheritance that really benefits the person with a disability and one that causes the person to lose access to a wide range of needed services and assistance. As an illustration of this, suppose that the trust instructed the trustee (manager) to pay the person with the disability $100 a month for life. Such a mandatory income might jeopardize government benefit programs, which only allow him or her to have $70 of income each month.

The first thing that may come to mind for most families who have had experience with government benefits is that the government says that a person with a disability cannot have a trust. Correct. However, the special needs trust does not belong to the person with a disability. The trust is established and administered by someone else. The person with the disability does not have a trust. He or she is nominated as a beneficiary of the trust and is usually the only one who receives the benefits. Furthermore, the trustee (manager) is given the absolute discretion to determine when and how much the person should receive.

Given the government's stringent requirements (see the text below labeled "What the Social Security Administration Has to Say About Special Needs Trusts"), it is critical that the trust be carefully worded and show clearly that the trust:

  • is established (grantor, settlor) by the family (persons other than the person with the disability);

  • is managed by a trustee (and successor trustees) other than the person with the disability;

  • gives the trustee the absolute discretion to provide whatever assistance is required;

  • should never give the person with the disability more income or resources than permitted by the government;

  • must be used for supplementary purposes only; it should add to the things provided by the government benefit program, not supplant (replace) them;

  • defines what it means by supplementary/special needs in general terms, as well as in specific terms related to the unique needs of the person with the disability;

  • provides instructions for the person's final arrangement (families should assume that when the individual with the disability dies no relatives will be alive who know what the mother and father would have wanted);

  • determines who should receive the remainder (what is left over) of the trust after the individual with the disability dies;

  • provides choices for successor trustees -- people or organizations that might be able to take a personal interest in the welfare of the person with the disability; and

  • protects the trust against creditors or government agencies trying to obtain funds to pay for debts of the person or the family.

Since the trust is a legal arrangement that is regulated by the laws of your state, there will be other sections that your attorney may need to insert. It is important to know that, while the majority of public assistance funds come from the federal government (which provides guidelines for SNTs), it is the responsibility of each state government to regulate trusts and administer the federal benefits. As long as the federal guidelines are followed to the letter, the state will accept the SNT, and the trust will fulfill its function.

What the Social Security Administration Has to Say About Special Needs Trusts

The Social Security Administration's (1990) publication Understanding SSI discusses special needs trusts as follows:

  • How do resources in this type of trust count in the SSI program?

  • Money or property in this type of trust for an SSI beneficiary...does not count toward the SSI resource limits of $2,000 for an individual.

  • How does money from the trust affect the individual's SSI payments?

  • Money paid directly to the providers for items other than the person's food, clothing, and shelter does not reduce SSI payments. (Items that are not "food, clothing, or shelter" include medical care, telephone bills, education, entertainment.)

  • Money paid directly to the providers for food, clothing, and shelter does not reduce the individual's SSI payments -- but only up to a limit. No matter how much money is spent for these items, no more than $155.66 (in 1991) is subtracted from the individual's SSI check.

  • Money paid directly to the individual from the trust reduces the SSI payment. (U.S. Department of Health and Human Services, 1990, p. 46)


Testamentary or Intervivos Trust: That is the Question!

At one time, the average attorney simply advised parents of an individual with a disability to prepare their Last Wills and Testaments and include a Testamentary Special Needs Trust. Upon the death of the parents, the wills would be probated, and the special needs trust would be created. In simpler days, this was pretty good advice.

Today, most attorneys who are experienced in estate planning for persons with disabilities will advise the family to prepare an Intervivos Special Needs Trust. Intervivos simply means that the trust functions now, while the parents are still living. As a "living" trust, it should not be confused with the modern estate planning tool for the family's main estate, the Family Revocable Living Trust. These are two very separate trusts. The Family Living Trust is designed to avoid probate, reduce estate taxes, and make for a smoother estate distribution. The Intervivos Special Needs Trust's sole function is to look after the future of the person with the disability.

Parents need not wait until their son or daughter is 18 years old to establish the Intervivos Special Needs Trust; they can establish the trust now. The trust is set up as a checking account at a local bank. Families can place funds into the trust every month and use these funds to cover the normal supplementary expenses of the person with the disability, as well as to save for the future. Using the trust funds to pay for the individual's supplementary expenses is also an excellent way of recordkeeping, for these expenses are tax-deductible.

An Intervivos or Living Special Needs Trust has other very unique features, such as:

  • It is a trust that is separate from the family's main estate.

  • The trust is managed by the trustees, who are usually the parents.

  • By paying for supplementary items from the checkbook, the family shows the future trustees the types of things that are appropriate to the person's needs and that have passed government scrutiny. The typical government challenge to a SNT comes when a trustee pays for nonsupplementary items. (In contrast, a testamentary trust -- one that is created after the parents have died -- gives guidelines on how to establish the trust; it does not give specific examples of how to administer it.) The simple checkbook with its stubs can help the future trustees use the Living Special Needs Trust properly and avoid expensive challenges.

  • Often relatives (e.g., aunts and uncles, grandparents) would like to leave an inheritance to the person with the disability but are concerned that, if they leave it to the person, he or she will lose government benefits or will mismanage the funds. Relatives like the concept of a trust, which is a nice legal way to make sure the person actually receives the full gift. With a testamentary trust, the parents of the person with the disability must die, their estate must be probated, and then the trust will be created. After the trust is created, relatives can leave money to the trust. The better option is to create a living special needs trust NOW. This permits relatives with tax concerns (i.e., those who need to give money each year to avoid large estate taxes upon their death) to give money into the trust now, rather than only upon their deaths.

In today's society, it has been said that 40-60% of the population will go into a nursing home before they die. The average family's total estate will be completely used up in one year to cover nursing home costs. In their wills, the parents may have generously given everything to the testamentary trust. Unfortunately, after nursing home care and Medicaid expenses, there may be no estate left for the testamentary trust. Even if a portion of the estate remains after the parents die, there may be a six month to six year wait while the estate is being probated. A testamentary trust would not be created or funded during this waiting period. What would happen to the supplementary needs of the person during such a wait?

Having a living special needs trust creates a much more secure scenario for the person with the disability. With this type of trust, the parents would have saved money each month for the future and may have purchased life insurance or transferred assets into the trust. Should they suddenly pass away or have to go into a nursing home, the living trust, which is a private matter, continues to function without interruption. The successor trustee designated by the parents would begin to administer the trust funds within a short period of time (one to two hours). Supplementary assistance to the person with the disability would continue without a break.


Revocable or Irrevocable?

Once the basic details of the trust have been agreed upon, you have to decide whether to lock the door and throw away the key, making it impossible to change the trust, OR to hold the key just in case you want to make some changes. With a Revocable trust, you retain the right to add and subtract assets as you go along. With this right, there are some potential consequences. The first and major consequence is that the government considers the trust to be part of your estate. Therefore, when you die, everything in the special needs trust is included in your estate for tax purposes and for potential lawsuits. What happens if someone sues your estate after you are gone? The assets in your special needs trust could be lost in such a lawsuit. Even if you only put a life insurance policy in the trust, it now reverts back to where your creditors and the IRS can lay claim.

If you make your trust Irrevocable, it means that any assets you place in it will remain there for the benefit of the person with the disability. If you need some of these assets later on for your own care, you cannot take them out. The advantages of an irrevocable trust may outweigh the disadvantages, as long as you do not place too much in the trust. If it is set up properly, it is completely separate from your estate. The irrevocable trust is considered a separate entity. It has its own tax number. Any assets that you place in the trust cannot be touched by your creditors for debts, taxes, and so on. Neither can the trust be touched by any creditors of the person with the disability.

What should you do? For younger parents, the answer may be a revocable trust. For older parents, the irrevocable trust may be the only option. Your attorney, in consultation with your financial planner, may be the best resource in making this determination. It is important, however, to have a current Letter of Intent (see article later in this News Digest), which will help your trustee interpret the "legalese" of either the revocable or irrevocable trust in light of your hopes and desires for the future.


Trustee: The Manager of Resources

It is one thing to leave resources to a trust, and it is quite another to manage them in such a way as to last the lifetime of the person with the disability. Every trust must have a trustee, someone who will manage the trust's assets. As most special needs trusts are established to provide supplementary assistance, they are generally quite small by bank standards. Ideally, it would be nice to have a local bank manage the trust resources, while taking a personal interest in the individual with the disability. Failing the location of a warm and loving trust officer, at least the bank would manage the funds and hire a social worker to look after the individual. Sadly, very few banks are willing to manage cash assets under $150,000 to $200,000 or become as involved in the person's life as you would wish.

In the case of a living trust and where there are sufficient funds and relatives, the family usually nominates future or successor trustees to manage the trust after the parents die or go into a nursing home. Families may even nominate a group of people to serve as joint trustees -- several relatives, perhaps -- who together administer the trust. It is important to list an advocacy or disability organization as the last successor trustee. This is because the possibility exists that the human successor trustees will die before the person with the disability. In the event that the human successor trustees are unable to serve, then the advocacy or disability organization may take on the responsibility or be able to recommend someone in their group who could do so. Of course, it is important to discuss this with the disability or advocacy group and obtain consent before listing the organization as a future trustee.


Master Trusts

The average family finds that they must rely on relatives or close friends to manage the trust funds. For many older parents with few surviving friends or relatives, the choice of a competent and caring trustee becomes very difficult or even impossible to find. The oldest son may be a fantastic, loving person to his sister with a disability, but may have difficulty managing his own finances, let alone the assets of the trust.

Many disability-related and other not-for-profit organizations have attempted to resolve this very serious problem by establishing Master Trusts. The individual special needs trusts are generally managed under the umbrella of a "master" or large trust fund. In this way, the family that may have only $50,000 or less to leave will have the assurance that the funds will be managed properly. The organization also promises to serve as an advocate for the person with the disability. Thus, the parents feel comfortable that someone will visit their son or daughter on a regular basis and look after his or her interests.

As the population grows older and develops nursing care needs, with family members living further apart, and with financial institutions becoming more conservative, the Master Trust may be the only real answer to the dilemma of small trust funds managed by people who actually care about persons with disabilities. Today, the average master trust in the United States is established by a local charity or nonprofit agency to serve persons with one or more disabling conditions. Occasionally, a few charities serving different populations will pool their resources to establish a community trust. A full-time executive director, along with a secretary, work with a Board of Directors. The prospective family pays approximately $500 to $2,000 to receive basic life planning counseling and as a set-up charge. The family generally hires an attorney recommended by the charity to do the basic legal work, which may cost from $500 to $3,000. The charity also refers the family to a reputable financial planner to make sure that the trust is funded properly. The master trust staff will usually meet with the family once a year to make sure that everything is in place. This annual "check-up" may cost between $50 and $100. Should the parent(s) go into a nursing home, the Master Trust can be activated. Assuming there are sufficient cash reserves in the trust, an advocate will look after the person with the disability. And upon the death of the parents, the trust will be fully activated through guaranteed life insurance proceeds or a portion of the family's estate. This is the ideal.

Unfortunately, although the concept of Master Trusts has been around for many years and may indeed represent the only viable answer to the need of many individuals with disabilities for lifelong care, Master Trusts have yet to find a proven formula for success. The track record for many of these types of trusts is very poor. Many are set up but fail within three to five years. Why do they fail? Although there are many reasons, basically the average master trust signs up only eight to ten individuals over the three-year start-up period, which is often funded by a grant. When the grant runs out, the Master Trust soon ends, in part because of the cost of hiring and keeping staff to manage the trust, but also because the eight to ten families were usually the key leaders of the organization and the strength of its membership. The majority of other members were never properly introduced to the merits of this fine program. Furthermore, the trust was created and managed by individuals who were primarily interested in the care of loved ones with disabilities, not in the business of marketing the trust to others. To work in the long term, the trust has to be sold in a businesslike, even aggressive manner.

Of course, not all Master Trusts fail. There are some that have operated successfully for many years. However, because the concept of a Master Trust has generally not proven successful, it is essential that families take a hard look at any Master Trust they are considering joining. Families should make sure that, if the trust does end, they have an escape clause whereby they can get back their assets.


Funding a Special Needs Trust

As families do their estate planning for their loved ones, they tend to think of it as a legal issue only. However, the lawyer can only establish the trust for them. Someone has to find the funds to put in it and make sure that there are sufficient funds to last the lifetime of the individual with the disability. That person is a financial planner.

The general perception of a financial planner is someone who is going to try to sell you investments and insurance through high pressure techniques. While the financial planner may very well use various financial products to fund the trust, the more reputable planners realize that most families have limited resources. Therefore, the planner's primary job is to help the family see what resources are available and then reallocate them, so that the future funding of the trust will be realistic.

As with attorneys, there are very few financial planners who have any experience with planning for the future of a person with disabilities. Most are trained to look at the overall family estate and try to provide as many dollars as possible, at the same time looking out for potential problems. When they realize that there is a person with a disability involved, they may react in a very human way, assume that the person will need extra help, and direct more dollars to the person with a disability, without understanding the consequences this might have in terms of the person's government benefits.

An experienced financial planner will examine your Letter of Intent (see the article of the Letter of Intent later in this News Digest) and do a detailed financial analysis based on the future costs of supplementary items and advocacy. He or she will then look at the many different resources available to fund the trust now and in the future. (See the Worksheet for Costing Out Expenses of the Person with the Disability, later in this News Digest, which you can use to list the total monthly expenses of the person with a disability. When you subtract the total amount of government benefits and personal income of the person from the total monthly expenses, you have identified the amount of supplementary funds needed on a monthly basis by the person with a disability.) The only other major expense will be the cost of advocacy services, which may run from $50 to $100 per hour.

Most families are surprised to learn that they do have a variety of resources within their reach that can be directed to the Special Needs Trust. The options open to a family include:

  • Standard government benefits. These benefits form the foundation for the future.

  • Savings. No matter how you look at it, the family will have to SAVE for the future. The government benefit programs have never provided enough for even poverty level existence. A regular savings program is essential to meet the person's supplementary needs in the future.

  • Family assistance. Family members may wish to provide residential care, supervision, and supplemental assistance in the future.

  • Parents' estate. Parents may leave a portion or all of their estate to the trust. To keep peace in a large family, parents should leave something for the other children as well.

  • Inheritances. Relatives or friends who have expressed an interest in the person with the disability should be given instructions and assistance on how to leave a gift to the trust.

  • Property. Some families want their loved one to live in the same house. The house can be placed in the trust and managed by a local nonprofit agency for the benefit of the person, or expanded into a group home setting.

  • Investments. Certificates of Deposit, IRAs, KEOGHs, and so on can be directed to the trust.

  • Military benefits. Some families have elected a Survivor Benefit Option (SBO), so the person with the disability will always have some income and medical care. They may still want a special needs trust to manage the other resources which will supplement the military benefits.

  • Insurance. For the average family, life insurance may be the only way that they can leave a large lump sum for the future by making small monthly payments. It is also one of the few guaranteed methods of funding a trust. While the above items may fizzle out as people change their minds or the economy falters, a paid-up life insurance policy in an irrevocable trust will guarantee future funds.

  • Other resources. Many families have resources that are unique to them. The financial planner will help you determine which ones are appropriate for funding the trust.

As families examine ways to fund the trust, they need to keep in mind something very important. Do not forget the other brothers and sisters. While the siblings may be pillars of love and understanding when it comes to their brother or sister with a disability, they have probably seen a great deal of your time and energy spent in the disability arena. They should not be left out at the end. Families tend to assume that, while they must pay for the services of a bank trustee and a guardian/advocate, relatives who take on these responsibilities should do so for free, because that is what families do! The trustee should be directed to pay for whatever services are necessary, whether an agency or relative performs the service. This may mean the difference between a brother driving the fifty miles to his sibling's group home once a week or once every three months.

With proper legal and financial planning, the family can guarantee that the person with the disability will enjoy a comfortable lifestyle after the parents are gone.


Worksheet For Costing Out Expenses Of The Person With The Disability

This Person's Income

Government Benefits _______
Employment _______

TOTAL MONTHLY INCOME _______

This Person's Expenses _______________

Housing:
Rental _________
Utilities _________
Maintenance _________
Cleaning items _________
Laundry costs _________
Other _________


Care Assistance:
Live-in _________
Respite _________
Custodial _________
Other _________

Personal Needs:
Haircuts, beauty shop _________
Telephone (basic, TT) _________
Cigarettes _________
Books, magazines, etc. _________
Allowance _________
Other _________

Clothing _________

Employment:
Transportation _________
Workshop fees _________
Attendant _________
Training _________
Other _________

Education:
Transportation _________
Fees _________
Books, materials _________
Other _________

Special Equipment:
Environment control _________
Elevator _________
Repair of equipment _________
Computer _________
Audio books _________
Ramp _________
Guide dog _________
Technical instruction _________
Hearing Aids/Batteries _________
Wheelchair _________
Other _________

Medical/Dental Care:
Med/Dental visits _________
Therapy _________
Nursing services _________
Meals of attendants _________
Drugs, medicine, etc. _________
Transportation _________
Other _________

Food:
Meals, snacks-home _________
Outside of home _________
Special foods _________
Other _________

Social/Recreational:
Sports _________
Special Olympics _________
Spectator sports _________
Vacation _________
TV/VCR or rental _________
Camps _________
Transportation _________
Other _________

Automobile/Van:
Payments _________
Gas/Oil/Maintenance _________
Other _________

Insurance:
Medical/Dental _________
Burial _________
Automobile/Van _________
Housing/Rental _________
Other _________

Miscellaneous:
Other _________
Other _________
Other _________

TOTAL EXPENSES __________

(Subtract)
MONTHLY INCOME
+ GOVERNMENT
BENEFITS __________

(Equals)
SUPPLEMENTARY
NEEDS __________


A Parent's Suggestion

Carol and her husband recently completed their estate plan so that their children would be provided for. They have twin sons who do not have disabilities and a son who has Down Syndrome. Here is what Carol has to say about the process of estate planning.

When my husband and I went to talk the lawyer, we hadn't really talked much among ourselves first. I thought that since we agreed on almost everything about caring for Frank, our son with Down Syndrome, we would be in agreement about how to provide for his future needs, when we weren't around anymore to care and advocate for him.

We found out, though, that we had different ideas. And we found out in the lawyer s office! Then we got home and found out our twins were hurt that we hadn't consulted them at all, had just assumed they wouldn't want to be responsible for helping Frank after we were gone. So then we did what we should have done before going to see the lawyer --- we talked as a family.

So my advice to other parents is: Before going to the lawyer for the first time, talk among yourselves about the future and your ideas for how to provide for your son or daughter with a disability. Then talk to the lawyer. Then return home for more discussion within the family. Then continue working with your lawyer and financial planner to create a plan the family can feel comfortable with.

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