“Special Needs” Trust
If someone you love has a disability, there are many needs to consider. A disability may be the result of an injury or illness, starting at birth or happening later in life. Planning for the future care needs, such as for a disabled child, grandchild, brother or sister, may be addressed comprehensively by creating a “Special Needs” Trust.
What is a “Special Needs” Trust?
A “Special Needs” Trust is designed to hold money or other assets to be set aside for a disabled beneficiary while still allowing them to remain eligible for Supplemental Security Income (“SSI”), Medi-Cal, and other needs-based governmental programs. Needs-based public benefits are available only to persons with too little assets and too little income.
The Social Security Administration (SSA) administers the SSI program. The California Department of Health Services runs the MediCal program, which is administered in each County by the local Department of Social Services.
When parents have a son or daughter with a disability, they must plan their estate carefully for their child’s best benefit. How parents leave their assets after death may greatly affect the quality of life for their son or daughter with special needs.
Distributions from the Special Needs Trust
The Trustee of a Special Needs Trust distributes funds only for the beneficiary’s “special needs”. These may be items or services not otherwise provided by public benefits such as SSI which is intended to provide adequate “food, shelter and clothing”, and MediCal which covers basic medical care. All other needs of the beneficiary may be supplemented by the “Special Needs” Trust.
Before making any distribution for the benefit of the beneficiary, the trustee will need to be familiar with what assets the beneficiary owns and the value of those assets, how much income the beneficiary receives each month and from what sources and, of course, the beneficiary’s needs and desires. While the beneficiary is receiving SSI, the trustee should be familiar with how the SSA determines the amount of his or her SSI benefit.
The SSA will categorize any distribution the trustee makes to or for the benefit of the beneficiary as some form of income. If the income is used to purchase an asset or is still unspent at the end of the month, it becomes a resource. Therefore, the trustee must be aware of both the income rules and the resource rules for SSI qualification.
Trustees need to keep accurate records of all payments and distributions they make, as verification may be requested by SSA or the Department of Health Services.
Resources
A resource is any asset counted under the SSI rules in determining eligibility. Anything that can be converted to cash for support is a resource. A beneficiary is allowed to have only $2,000 or less, in resources. If resources exceed that limit on the first day of any month, the beneficiary will lose SSI and Medi-Cal for that month.
Income received during the month is income, but it becomes a resource the next month if the beneficiary still has it.
Exclusions from Resources and Unavailable Resources
Two kinds of assets are not counted for SSI, those that are “not available” and those that are “exempt”.
Resources that are “not available” are those to which the beneficiary has no legal right, such as the assets in a “Special Needs” Trust. Any money distributed by the Trustee directly to the beneficiary would be income to the beneficiary, but the remainder of the trust estate would not be an available resource.
Certain resources are “exempt” and do not jeopardize the beneficiary’s SSI and Medi-Cal, so the trustee may acquire these types of assets for the beneficiary. However, the trustee may not give cash to the beneficiary to buy these exempt assets, since the cash would be treated as income. Exempt resources include:
- A home which is the beneficiary’s principal residence.
- A car
- Household goods such as furniture, equipment and supplies; and personal effects such as clothing, jewelry and musical instruments.
- Life insurance policies with cash surrender value of less than $1500, which includes all term policies since they have no cash surrender value.
- A burial plot or space of any value and a burial fund worth up to $1500 reduced by the cash surrender value of any life insurance.
Who should be the Trustee of a Special Needs Trust?
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 who will manage the trust assets. Anyone except the beneficiary (or his or her spouse) can be a Trustee of a special needs trust. Fortunately, there are always other options for Trustee, including a licensed professional fiduciary, a bank, or a qualified family member.
Regardless of who is selected, the trustee must have some essential characteristics. My colleague Linda S. Durston, Ph.D., J.D., who is a member of the Academy of Special Needs Planners, recently summed up these qualifications nicely:
“Every trustee should have common sense and good business sense; be honest; be organized; know when to ask for the assistance of a certified financial planner (CRP), a certified public accountant (CPA) or an attorney; be physically and mentally capable of dealing with the legal, tax, investment, accounting and interpersonal issues that arise in the course of administration, and have time to handle those tasks. A special needs trustee with also need to understand the beneficiary’s special needs, government benefit programs and the effects of distributions on public benefits eligibility.
There are some circumstances where a trustee must have additional qualifications. For example, here in . . . California, we often must establish a Special Needs Trust by petitioning the Probate Court. This typically happens after a litigation recovery by an incapacitated or minor plaintiff, or after an inheritance by someone whose parents failed to incorporate special needs planning with their will or living trust. In those instances, whoever serves as trustee must be bonded (i.e., for the amount held in trust, plus interest, plus the costs of recovering on the bond). The trusts must also be prepared to account and report regularly to the court for all activities and expenditures on behalf of the trust. These bonding/reporting requirements can be onerous, and not everyone has the personal credit rating or the experience to do what’s necessary to satisfy the court.”
Parents with a disabled child may include a special needs trust in their estate planning. To create a more secure transition, families may wish to establish a special needs trust while they are living and contribute funds regularly or purchase life insurance to be added to the trust. Grandparents and other family members may also wish to contribute to the special needs trust which is already in place to protect the disabled loved one.
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.
Having a child or other family member with a disability is stressful in many ways. Preparing for their future needs involves a thoughtful and realistic plan. Attorney Jennifer Wilkerson can walk you through these complicated but important issues, step-by-step.