If someone with special needs depends on you for financial resources, your estate plan should address how that support will continue when you’re no longer around.
A special needs trust allows you to leave money for the care of your loved one that won’t count against Supplemental Security Income, or SSI, and Medicaid benefit thresholds, because the beneficiary doesn’t own the assets.
To determine eligibility for SSI, the federal government counts any resources above $2,000. Medicaid income eligibility limits vary by state. Some states automatically approve anyone receiving SSI benefits; others have their own income and asset limits.
Anyone who qualifies as disabled under the Social Security Act can be the beneficiary in a special needs trust, says elder law attorney Amos Goodall in State College, Pa.
Types of special needs trusts
The most common type of special needs trust is a testamentary or third-party trust, says Certified Financial Planner professional Heath Burch, co-founder of The Special Needs Planning Center in Kansas City, Mo. This document is drafted for future use, with no current funding.
A self-settled or first-party special needs trust is funded using the beneficiary’s own assets, such as money from a gift or a court settlement.
One important element distinguishing first-party and third-party special needs trusts is the payback clause.
“With a first-party trust, if the special needs dependent dies and there are assets left in the trust, the government is able to retrieve whatever assets are left. In a third-party trust, that is not the case,” says Don Brown, a special needs planner for MetLife.
A third type, called a pooled trust, is designed for grantors with limited assets.
“You would put your money in with lots of other people’s, and the trust document is taken care of by a nonprofit organization,” Brown says.
How to set one up
Setting up a special needs trust is not a do-it-yourself project, says Goodall, a member of the Special Needs Alliance, a national nonprofit organization of lawyers serving disabled people and their families. A lawyer will know best how to tailor the document to your individual circumstances and build in as much flexibility as the law allows, he says.
The person you name as trustee will be charged with managing the trust and distributing its assets on behalf of the beneficiary. Burch prefers family member trustees, though he acknowledges it’s not always possible to find an appropriate relative.
“In that case, we would have the family name a professional trustee, maybe search out a bank trust department,” says Burch, who also recommends naming at least one contingent trustee.
David Light, a financial adviser with Ameriprise, says whoever you pick for this duty should know the beneficiary well. Light’s parents chose a family member as the trustee for his two special needs siblings, who are covered jointly in a single trust.
On the other hand, because of the fiduciary responsibilities involved, Goodall favors institutional trustees. “It’s a complicated area for a trustee to navigate,” he says.
Funding the special needs trust
If you’re setting up a third-party trust, you’ll need to estimate how much assistance the beneficiary will need and determine the source of those funds. Think of the process as an extension of your retirement planning, Burch says. Once you’ve figured out the amount of assets you’ll need to live out your retirement years — including caring for your special needs child while you’re alive — you can determine what remaining assets should be used to fund the trust.
“If the expectation is that Mom and Dad will exhaust those assets in their lifetime, then you have to start looking for other sources of funding,” Burch says. “It could be life insurance. It could be leaving the house into the trust.”
The MetLife Center for Special Needs Planning website has a link to a special needs calculator for estimating expenses — from housing and other general living costs to such things as respite care, nursing services and personal needs.
Once the trust is funded, the trustee has to file tax returns on behalf of the trust. Besides payments to an accountant to handle that task, another potential operating cost is a financial adviser to manage the assets. Burch says institutional trustees such as banks usually charge a percentage of the assets in the trust, typically ranging from 0.25 percent (for large accounts) to 2 percent.
The funds in special needs trusts can be used to pay for anything from medical expenses not covered by SSI and Medicaid to vacations and entertainment, as long as the expenditure helps the named beneficiary. Medicaid and SSI officials review trust expenditures to determine whether they are appropriate, Goodall says.
An optional letter of intent attached to the trust allows you to express your wishes about how the funds should be used, along with special notes about the beneficiary’s preferences.
“It’s the ‘color of your socks’ letter,” in which a parent might mention details like the fact that an autistic child will only wear yellow socks, says Light. He calls the letter of intent “one of the most underutilized tools in estate planning.”