Posted by Alicia Waltenberger.
Several years ago, two of my clients came to me asking for help. Nancy and Bill were the loving parents of three grown-up children, a son and two daughters (now in their 40s). The son had special needs, and they visited him regularly in a long-term care facility where he received skilled nursing care round the clock.
They’d always intended to leave everything to the daughters, trusting that they would continue looking after their brother’s financial needs. After writing a will, they didn’t give the matter any further thought.
Since retiring, however, they’d started thinking more seriously about the future in general—as well as the future of their son. The informal arrangement they’d made as a family no longer seemed adequate. They realized it was putting undue pressure on their daughters, who had families of their own. For example, what if one of the daughters died? Would her husband and children take on the responsibility of caring for her brother?
It was time to create a more solid estate plan, something better geared toward their unique situation. I suggested that a Special Needs Trust (SNT) might give them the peace of mind they were looking for.
What’s a Special Needs Trust?
For anyone passing money on to a loved one, a trust can help ensure that your assets are distributed on your terms. For a family member who may be unable to handle his or her own finances, an SNT can be especially helpful.
An SNT is designed to take care of physically or mentally disabled loved ones in the event you become unable to do so yourself. If you have a loved one who struggles with basic arithmetic, who may not understand the importance of paying bills on time or who may be susceptible to imprudent financial choices, an SNT can help protect your loved one.
Aren’t trusts just for wealthy people?
Many families can benefit from a trust, whatever their income level. Nancy and Bill used a life insurance policy on their lives in order to fund their son’s SNT, making sure that he had a certain amount of income provided for his welfare.
We examined their son’s eligibility for government assistance or benefits, such as Supplemental Security Income (SSI) and Medicaid. Such needs-based programs can be a godsend to people with a severe disability. When structured correctly, an SNT can ensure that the money you leave is available for the beneficiary’s needs but is not under their control and, therefore, not “counted” as belonging to them for aid eligibility purposes.
If your beneficiary receives Medicaid coverage for long-term care services, federal law requires his or her state to recover any amount that Medicaid spent on their behalf from their estate after they die. 1 However, if your SNT is carefully crafted, it can provide protection against these claims, and assets may be passed on to heirs after the death of the disabled beneficiary.
To ensure that trust assets would not count toward their son’s eligibility for benefits, Nancy and Bill’s SNT had to be shaped in such a way that their son could not receive payment on demand. Instead, it included guidelines authorizing certain expenditures and prohibiting others. For example, the trust allowed distributions for personal care items, but not for their son’s basic needs such as food and shelter, since those needs can be met by government programs. Adding this provision meant that needs-based benefits would likely never be reduced or interrupted.
Before establishing an SNT, you’ll need to consider the severity of your loved one’s disability and medical needs, and whether or not they have the potential to be self-sufficient at some point in their lifetime. Every SNT is different, with terms that reflect the beneficiary’s special needs. Your estate planning attorney can help you tailor your trust to your unique situation.
Choosing the right trustee
When setting up an SNT, you’ll need to name a trustee. That requires careful consideration. A trusted family member is often the preferred choice. Ideally, assign someone who is not only trustworthy and reliable but who also has investing or legal experience. You may also decide to pay for a professional trustee, or to appoint multiple trustees in case your first choice resigns, dies or is otherwise unable to manage their duties.
In the case of Nancy and Bill, they named their daughters as partnership trustees to jointly handle the day-to-day financial decisions that mom and dad were currently taking care of. They work together with an investment professional who helps manage the funds in the SNT.
Ever since they established their SNT, Nancy and Bill have been expressing their gratitude for making this life-changing decision. They’ve been sleeping so much better at nights knowing that their son will be protected no matter what happens to them. It’s a huge relief to know this big financial burden no longer hangs over their daughters, who already have a lot on their plates, including paying for their own kids’ college. An SNT did away with their biggest worry and is now allowing them to enjoy their retirement years to the fullest.
With a well-written trust and competent trustees looking after it, you can rest assured that no matter what happens to you, you’ve increased the odds of your loved ones being taken care of.