Special Needs Trust: Put Money Aside Without Jeopardizing Benefits

As you have been moving through the process of providing for your child with special needs, you have probably heard that you need a “special needs trust.” Before you contact an attorney, let your special needs planner help explain this type of trust and how it will affect your child.

This trust is an important part of the planning process. It lets people know what your wishes are in regard to your child, but, more importantly, it can help your child qualify for benefits and programs that are vital to her health and happiness.

What is a special needs trust? It is a vehicle that holds assets that are to benefit your child. It is also the instruction manual for how assets should be handled. It answers the question of who is in charge and if there are limits to how the money for your child is used. It can be set up by anyone except for the beneficiary, and it can be used for supplemental care for your child. The beneficiary of the special needs trust cannot be changed. However, the trust can, and should, be amendable if the laws change.

When do you create it? There are two times when you can create a special needs trust. The first is at your death, and the second is now, while you are alive. Many times attorneys set up what is called a “testamentary trust,” which your will creates and activates only upon your death. However, certain laws could change before your death that could affect such a trust. It is cumbersome to change a trust that your will creates, so you might consider creating a special needs trust now. You can do this by having your lawyer draft a stand-alone trust. This way it will be easy to change the trust if the laws change. Your lawyer would send you a “trust amendment” that you would sign and keep with your trust papers.

In addition, if the special needs trust is already established and the laws change, the laws set today would most likely be grandfathered into the trust. If your will creates the trust and you don’t change your will, the “testamentary trust” may not receive favorable treatment. Setting up a trust with the current laws also allows others to use or refer to the trust that the parents set up (such as for gifts or inheritances).

For example, Grandma wants to leave money to the child with disabilities. If the child receives the inheritance directly, it could disqualify him from getting government-based benefits or getting into certain programs. Under current laws, if Grandma names the trust as the beneficiary, then this prevents the government from disqualifying the child from receiving benefits (provided the trust is drafted properly).

How do you fund a special needs trust? Any asset, including proceeds from life insurance policies that you have for the benefit of your child, should be titled under the trust. There are three primary ways that a trust can be funded: inheritance, savings on the child’s behalf and child support. It is very important that you remember to change the beneficiary of your retirement, annuity, IRA and life insurance accounts to the child’s special needs trust. Be sure to speak with a financial professional before you do this so that you are aware of certain tax consequences. Remember, anything that comes to the child directly may disqualify him from benefits and programs.

PhotosToGoUnlimited-882895What happens if an asset does come to the child directly? It happens. Grandma had several bonds that she had been buying for your child during the last 10 years and they are in the child’s name. There is a solution for that. It is called a “payback trust” or OBRA 93 trust. The purpose of the payback trust is to place these assets into the trust to be spent on supplemental care during the life of the child. However, only the child’s parents, grandparents, legal guardian or the courts can create this trust. The child cannot do it himself or herself. When the child passes away, whatever is left in the trust reimburses the state for benefits paid during the lifetime. Whatever is left after that passes on to the heirs.

What about setting aside money for my other children? This is a difficult one for many parents. The heart tells us to divide the assets evenly, but that is not always the logical thing to do. The decision is not an easy one and involves several factors that are both tangible and intangible. Your other children may have more opportunities to do things for themselves than the child with a disability. They may have the chance to go to college, get married, have a job and have children. The child with disabilities may or may not. A special needs planner can help you walk through the decision-making process.

What do you mean that was the easy part? Setting up the special needs trust was the easy part. The hard part is choosing Future Care People™ for your child with special needs. You will need to consider who will want to handle the day-to-day living responsibilities, what goals you have for your child and who is willing to learn what is involved in making daily decisions for your child. Ask potential caregivers to take the child for the weekend and see how they manage.

What are some other considerations that I need to be aware of? Have a conversation with your attorney about how to choose caregivers for your child in the event of your death. You may also want to decide if the guardian and trustee should be the same person. A special needs planner can help you through these emotional decisions before you get to the attorney’s office.

A special needs trust is a tool in the special needs planning process that provides for care above and beyond the basic living needs and allows you to maximize the benefits that your child receives. Having a knowledgeable special needs planner and estate attorney is an invaluable asset to you and your child. If you have not yet set up a special needs trust, you need to set up an appointment with a planner to discuss your situation and your next steps. It is too important for you to delay.

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