Lifetime Money Management for Children With Disabilities

2/2024

Children with disabilities present a unique challenge for parents who are looking to engage in estate planning. For one, you will want to optimize your estate to use, enhance, and enrich assets for your child. At the same time, maintaining their enrollment in public benefits programs is no doubt going to be essential.

To ensure you meet both of these objectives requires careful planning. An experienced attorney can prepare a special needs trust to accomplish these and other goals you may have for your child.

How a Special Needs Trust Works

Qualifying for means-tested assistance programs, such as Supplemental Security Income (SSI) or Medicaid, typically requires benefits recipients to meet strict financial criteria. A special needs trust can help an individual with disabilities meet these stringent rules. This is because the assets held in this type of trust are not directly available to the child.

A trustee of a special needs trust provides benefits to the child via the trust. Parents should select this trustee with great care. The trustee will act as the child’s money manager, ensuring proper supervision of their finances in the event that the child’s parents pass away.

A letter of intent can also be a powerful tool that helps to guide the trustee in making decisions that will best serve the child’s unique needs.

Choosing a Trustee for a Special Needs Trust

In most cases, your child will benefit from you selecting a dependable individual to serve as their special needs trustee. You may wish to select a person who is not a family member and who would be independent in carrying out this role.

You have a range of options, including the following:

• A parent, sibling, or another relative (which, again, can be risky)
• An experienced estate planning attorney or special needs planning attorney
• A financial institution or a trust company
• A nonprofit organization, particularly one with special needs experience
• Co-trustees, such as a trust company, acting in conjunction with a family member

Each of these options can have advantages and drawbacks. Keep close counsel with your estate planning attorney or financial advisor before you select a trustee.

When to Set Up Your Special Needs Trust

The creation of your special needs trust can happen while you are living or at the time of your death.

Parents often set up the trust while alive; this is known as a living trust (or inter vivos trust). A living trust boasts certain advantages, such as:

• avoiding probate;
• permitting other family members (for example, grandparents) to make trust contributions; and
• giving a co-trustee the opportunity to experience what it’s like to administer the trust.

Alternatively, a last will and testament can incorporate creating the trust, known as a testamentary trust.

Types of Trusts

Note that whether a trust is revocable or irrevocable affects tax consequences.

Generally, a revocable trust can be changed at any time and so is used to maintain maximum control over the trust. With this type of trust, income tax considerations are not a concern.

Irrevocable trusts, which cannot be changed once they are created, are often used to minimize income tax consequences, particularly if the trust funds exceed $1 million dollars. In this instance, both federal estate and gift taxes may apply to the trust.

A special needs trust is usually irrevocable and may be a first-party or third-party trust, depending on how you choose to fund it. Relinquishing control of the trust to a trustee protects your child’s government benefits. which can be vital to maintaining their health and living arrangements.

Money in the trust will not be counted toward income or asset limits by Medicaid or Social Security programs. This ensures that your child will continue to qualify for the support they need while also being able to receive gifts from family members that may further enhance their quality of life.

Why Special Needs Trusts and Estate Planning Are Important

Verbally telling your family how to care for your child is insufficient. In the absence of a will or trust, the state in which you live may determine the outcomes of your estate’s distribution. This situation is not a viable option for a child with special needs or any of your children.

Receiving proper legal guidance on the appropriate trusts to use in your estate plan is crucial to your child’s future. Do not attempt to craft these legal documents on your own, use existing forms, or copy an online internet template. Each child with special needs requires careful considerations unique to them and the challenges they face.

With so much at stake, be sure to seek out the expertise of your attorney. They can tailor your estate plan to best suit your wishes as well as the specific needs of your child. Protecting public benefits such as Supplemental Security Income (SSI) and Medicaid will help safeguard your child’s well-being into the future. Establishing a special needs trust through the estate planning process is a key way to achieve this goal.