The Special Needs Trust is a useful and sometimes necessary estate planning option for individuals who have a child that has a mental, social or emotional disorder. These children will often never be financially independent and the concern for most parents is the inevitable situation when the parents die before their child.
DEFINING SPECIAL NEEDS TRUST
A Special Needs Trust also known as a Supplemental Needs Trust or SNT is a Trust designed to hold assets for the benefit of a person with disabilities or special needs. Assets placed into a properly drafted Special Needs Trust are not counted for purposes of determining eligibility for government benefit programs such as Medicaid and Supplemental Security Income (SSI). A beneficiary of a Special Needs Trust can maintain eligibility for government benefit programs and still have funds available from the Trust to provide for the beneficiary’s supplemental needs, including:
- Personal Items
- Outings and Vacations
- Travel and Transportation
- Vehicles and Costs to Make Vehicles Accessible
THIRD-PARTY SPECIAL NEEDS TRUSTS
A third-party SNT is a very useful estate planning Trust commonly used by parents and grandparents to provide for a child’s or grandchild’s future needs. A third-party SNT can be included in the Last Will and Testament (known as a “testamentary Trust”) of the parent or grandparent or it can be a separate, stand-alone Trust (known as an “inter-vivos Trust”). The testamentary Trust is not funded until the death of the parent or grandparent. An inter-vivos Trust is usually funded while the parent or grandparent is still alive.
SELF-SETTLED SNT OR FIRST-PARTY FUNDED SNT
A “Self-Settled” SNT is often used in situations where an adult individual becomes disabled and their own assets, typically from a personal injury settlement or verdict, fund the SNT. “Self-Settled” SNTs must include what is commonly known as a “payback” provision. This provision states that any funds that remain in the trust at the time of the disabled individual’s death must be paid to the state in an amount equal to the medical assistance paid on behalf of the individual. If there are any funds left over after the payback, those funds will be paid to beneficiaries in accordance with the terms of the trust.
GUIDANCE TO CREATE AN SPECIAL NEEDS TRUST IN PENNSYLVANIA
- Anyone considering the Special Needs Trust should contact an estate planning attorney in Pennsylvania. The SNT must be carefully drafted to take advantage of all of its benefits and to ensure that the child will have the financial resources necessary to supplement government benefits. Finding an attorney who can draft the Trust to accomplish the goals and objectives of the parents, grandparents, and child is critical.
- An estate planning attorney with experience with SNTs will discuss the goals and objectives to determine whether a third-party Trust (testamentary or inter-vivos) or a Self-Settled Trust is appropriate.
- Perhaps the most important function of the Special Needs Trust is to preserve eligibility for medical assistance through Medicaid and Social Security. When a child qualifies for Supplemental Security Income (SSI), it means the child has a physical or mental condition that results in severe limitations for the child. It also means that the child has very limited income and resources. Under the Medicaid program, the child also must meet stringent income and resource guidelines. A properly drafted and funded Special Needs Trust will not disqualify the child from receiving these benefits. The funds in the Trust can then be used to supplement the benefits the child already receives through these government programs.
- The Special Needs Trust must be managed by a person or entity known as a “Trustee”. A Trustee is tasked with managing the trust assets, investing, and using the trust resources for the trust’s intended purpose. A Trustee is a fiduciary, meaning that the Trustee holds a legal and ethical relationship and must prudently act for the benefit of the child. Family members are often named as Trustees. Family members usually know what the child needs or wants and family members often have an inherent ability to act in the best interests of the child. Corporate Trustees are also an option.
- If the parent is creating the SNT, a guardian should be considered. Even though a guardian is not named in the Trust itself, a guardian should be named in the Last Will and Testament of the parent. A “guardian of the person” is someone who is designated by the parent to take care of the child when the parent dies. For children with special needs, naming a guardian should be given careful consideration. A guardian should be someone who has the time to devote to the child. The guardian should be someone who is responsible, loving, caring and compassionate. When a parent creates the Special Needs Trust, the trust can serve as the financial protection for the child. By providing the financial security through the Trust, preserving the government benefits, and naming the proper guardian, a parent with a child who has special needs can feel comfortable and secure knowing that the planning is in place to ensure a good life for the child.
QUALIFICATIONS OF A TRUST BENEFICIARY
The term “Special Needs” includes a multitude of conditions and can range anywhere from easily identifiable physical disabilities through a spectrum of various psychological, social, and emotional disorders or chronic or acquired illnesses. Severe disabilities almost always create a significant financial burden due to curtailed earning power and ongoing medical and necessary living expenses, so an SNT may be created for their benefit.
QUALIFICATIONS OF THE TRUSTEE
A Trustee is a person or entity who is in charge of the assets in the Trust. The Trustee must manage the assets, comply with the Trust terms, invest the assets, etc. After the parents are deceased, the Trustee will continue to use discretion when determining how the Trust assets are used. The Trustee can take into account the child’s needs and balance those needs with the amount of assets held in Trust so that the assets do not run out. This is most important when the child has a permanent disability and relies on the Trust for his or her care and support.
ADVANTAGES AND DISADVANTAGES OF SPECIAL NEEDS TRUSTS IN PA
Aside from preserving eligibility for government benefit programs, there are other advantages of creating an SNT. Setting up an SNT is essential for those unable to independently manage their finances. This is especially comforting when there is a concern that the person with a disability could be influenced or taken advantage of in matters concerning money. The Trustee’s job is not to provide money whenever the child wants it, but rather to only give out funds when they are to be used for services or needs under the terms laid out in the Trust. It is important to have a Trustee who is aware of the child’s needs, knows the laws relating to SNTs, and knows how to budget, invest and keep accurate accountings of the funds. In addition, the assets in an SNT are protected against creditors. This is another advantage. If the disabled child is sued over a personal injury claim, for example, and a judgment is awarded, the judgment creditor cannot seize the assets in the SNT.
Setting up a Special Needs Trust is better than leaving money or assets for the disabled child’s siblings with the idea that the siblings will take care of the child financially. Most parents believe that they can just leave everything to a brother or sister of the disabled child and that sibling will use the money for disabled child’s needs. While that may be true, there are many unforeseen circumstances that could impact this situation. For example, suppose the sibling is sued by a third party. The third party could seize the assets of the sibling which may include the money set aside for the disabled child. Another example is divorce. The soon to be ex-spouse may be able to treat some or all of the assets as marital property; therefore, the ex-spouse may actually take some of the money that is to be used for the disabled child. For these reasons, even the most well-intentioned sibling may find himself or herself in a situation where he or she cannot keep the assets safe.
While SNTs have great benefits and are widely utilized to protect and provide for those with special needs and other disabilities, there are disadvantages. Annual fees and a high cost to set up an SNT can make it financially difficult to create and maintain. Furthermore, the beneficiary has to request funds from the Trustee and the Trustee has complete discretion as to whether the request is appropriate based on the terms laid out in the trust. Thus, the person with a disability has very little control over the use of their money. This can lead to feelings of frustration and decreased independence. The disadvantages are usually far outweighed by the benefits and advantages of the Trust.
FUNDING THE SPECIAL NEEDS TRUST
There are various ways to fund an SNT, including life insurance, cash (including gifts from relatives and friends), investments, retirement plan benefits, personal property and real estate.
PENNSYLVANIA SPECIAL NEEDS TRUST GUIDANCE – THE MARTIN LAW FIRM, P.C.
The question of whether a person should have a Special Needs Trust is a personal one to answer, however, with the guidance and assistance of an experienced Pennsylvania Special Needs Trust attorney, concerns and questions can be answered and the process of creating the document can be done quickly and without issue. The Martin Law Firm has been helping clients with the Special Needs Trust in Pennsylvania since 2001. Contact us today at 215-646-3980.