Special Needs Trusts

If you watch TV, read magazines or newspapers, or even look at billboards, you get kind of a funny picture of our society. Our media is filled with emaciated, augmented women and men who must spend 8 to 10 hours a day at the gym. And they’re all young, healthy, and apparently well-adjusted and happy. We all know that this picture is kind of a cruel parody of life.

In reality, real people are kind of messy and complicated (dogs are much easier). They come in all kinds of shapes and sizes and with different personality types (maybe both dogs and people are that way). Although none of us really wants to talk about it, according to the Census Bureau about 20% of the population has special needs of some sort. Those special needs can be emotional, psychological, or physical. And they can vary in intensity from almost imperceptible to crushing. Those needs can be long-lasting or they can be life-threatening. Reportedly about half of those with special needs suffer from a “severe” disability. Life is way more complex than we see in the media.

For parents of children with special needs, this makes life challenging. They may need special medication; they may need special equipment, including chairs and lift; and they may need special care.

Being maybe a little more sensitive to this than many people, I see families heroically struggling to care for their special needs children all the time. It may be special education, therapy, or home modifications. And then there are the daily care needs.

But the scary question is what happens when both (or either) mom or dad is/are unable to provide that care? What happens when mom and dad are gone? Is there still some way to provide for them?

In planning the estate of people with special needs children, there are several options available, although in my mind only one good one. For instance, you could simply leave that child out of your will or trust. Leave them nothing. After all, they are probably on some government benefit programs. They’ll be taken care of, right?

Well, yes and no. The government programs are God-sends for most people in these situations, but they really only provide the minimums. It’s kind of Spartan, even under the best of circumstances. So that’s probably not a great solution.

You could also just leave them their fair share of your estate in trust with the trustee appointed to take care of things. The problem with this option is that these trust funds will in all likelihood be treated as “available funds” for Medicaid purposes which will be counted in calculating the child’s financial need. These funds will probably result in the termination of their state aid until those assets are completely used up.

You could also leave a share of your estate to another child with the understanding (but not the obligation) that they will use the money for the benefit of the special needs sibling. My experience is that this arrangement imposes an awkward burden on the non-disabled child. Also, over time, that money gets mixed-up (co-mingled) with the healthy child’s other assets. Without meaning to, the money gets absorbed into the person’s other assets and becomes indistinguishable. Finally, those funds can be exposed to the non-disabled child’s creditors or caught up in a divorce.

In the final analysis, the best option under these circumstances may be a special needs trust (an “SNT”). An SNT is a trust for the benefit of a disabled child. Although such a trust can be set up by the individual (a “self-settled trust”) for his or her own benefit, using his or her own assets (such as insurance proceeds from a debilitating accident), that is not what I am talking about here.

This is a “third-party SNT”. The statute approving third-party SNTs specifically refers to trusts established by parents, grandparents, or guardians, so it is clear those trusts are acceptable. However, courts in most states have recognized the rights of siblings, friends, or caregivers to establish or contribute to these trusts as well.

The trustee of such a trust generally cannot provide for housing or food ( there are exceptions though). However, the trustee can clearly provide for the disabled child’s care by family members; medical services and equipment not covered by government programs; housekeeping, grooming, and meal preparation; certain household costs; certain computer and communication equipment; televisions and tablets; home decoration; vehicles or other transportation; vacations and travel costs; and the list goes on.

One of the drawbacks of a self-settled SNT is that on the beneficiary’s death, the trust will probably have to repay the government for any amounts the beneficiary received before making any distributions to family members. Not so with the third-party SNT. With a properly drafted trust, there is no reimbursement obligation. The remaining trust assets can go to the surviving family members.

In the end, families with special needs children should seriously consider an estate plan with an SNT. We don’t know what the future holds, but we can assume that government benefits will provide at least a basic safety net. However, as parents, we typically want to provide a little something extra for our children. We can do that with an SNT.