The Pros and Cons of a Special Needs Trust: Ensuring Your Child’s Future
A child’s financial future is daunting enough but adding in a child’s special needs can create additional anxiety. Parents often wonder who will care for the child and how the child’s needs will be met once they the parents are no longer around.
Often times, parents of children with special needs consider a Special Needs Trust (SNT) to help ensure their child’s health and welfare needs are met. When deciding whether or not to use a SNT to plan for your child’s future, there are many things to consider. Most importantly, whether one is needed in the first place.
Do You Need a Special Needs Trust?
Historically, joining Medicaid was one of the only ways for people with special needs to get health coverage. To participate in Medicaid, however, a person’s financial resources were limited to $1,500.
So what to do with resources over that amount? If the person tried to transfer the funds to someone else to make it appear as if they met the resource eligibility, the person could be subject to a 36-60 month “look back,” which essentially meant that he or she could be ineligible for Medicaid or SSI for 3 to 5 years after the transfer.
Staying eligible for Medicaid
The answer was to create a Special Needs Trust (SNT). Individuals with disabilities could transfer money into a SNT without triggering the “look back” and without having that money (or money contributed by parents or other third-parties) count towards the resource limits for Medicaid or SSI eligibility.
This meant that people with disabilities could stay on Medicaid and still have access to those funds to cover services “over and above what the government provides.”
The Affordable Care Act
With the passing of the Affordable Care Act and its prohibition on denying coverage to those with pre-existing conditions, as well as the Pre-Existing Condition Insurance Programs (PCIP), Medicaid may no longer be the coverage of choice for people with disabilities. Thus, there may not be a need for a SNT when it is used solely as a way to maintain eligibility for Medicaid or SSI.
The Pros and Cons of a Special Needs Trust
But There are benefits of having a SNT other than to preserve eligibility for government programs, and indeed, SNTs are essential for persons who are unable to independently manage their finances. Below is a summary of advantages and disadvantages that you should consider when deciding whether to set up a SNT for your loved one.
Advantages to SNT
- Can keep person eligible for government programs like SSI and Medicaid and help pay for services and care over and above what the government provides.
- Funds used to create a SNT are tax-deductible.
- Ensures that funds are used for the care of the person with a disability – This is especially comforting when there is a concern that the person with a disability could be influenced or taken advantage of in matters concerning money.
- Funds are not available to creditors or for paying judgments – The money is used only for the care of the person with a disability.
Disadvantages to SNT
Annual fees and a high cost to set up a SNT can make it financially difficult to create a SNT – The yearly costs to manage the trust can be high. Also, there are often minimum amounts required to set up a SNT. It is important to check with a Financial Planner with experience in special needs planning to see what the actual costs will be.
- Lack of independence
The beneficiary has to request funds from the trustee and the trustee has complete discretion as to whether the request is appropriate based on the terms laid out in the trust. Thus, the person with a disability has very little control over the use of their money. This can lead to feelings of frustration and decrease independence.
- Medicaid payback
Certain funds in a SNT must be used to pay back Medicaid in an amount equal to the amount Medicaid paid on the person’s behalf. This often results in the trust being completely wiped out once the Trust ends (either at the person’s death or through legal termination of the Trust).
Once you have decided to set up a SNT, there are other things you must consider, including who to have serve as Trustee and whether or not to use an attorney to set up the SNT.
Who Should You Trust to be the Trustee?
The Trustee’s job is not to provide money whenever the beneficiary wants it, but rather to only give out funds when they are to be used for services under the terms laid out in the Trust. In other words, the Trustee has all the power. Thus, it is important to have a Trustee that knows the person’s needs, knows the laws relating to SNTs, and knows how to budget, invest and keep accurate accountings of the funds.
Often times, this means that the Trustee is a professional. Having a professional can increase the annual fees; however, it is important to ensure the funds are being managed properly for the benefit of the person with a disability.
Keeping a family member involved
To ensure the person’s needs are being met, often times a family member will serve as a co-Trustee with a professional. However, this can create problems if there is a disagreement in how to manage funds. Thus, it is important to spell out in the Trust document how the relationship between co-trustees will work.
The Trustee should know the child and the needs
It is also important to choose a person that has the child’s best interest in mind and who knows what the child’s needs are. As the person ages, his or her needs may change so it is important for the Trustee to be aware of the person’s condition and future needs.
Audit the Trustee
Finally, for an increased cost, auditing and trustee monitoring services are available. This is typically an independent organization or group that can audit or oversee a Trustee on a regular or as-needed basis.
Do You Need an Attorney to Start A Special Needs Trust?
With the advent of the internet, there are many do-it-yourself legal services that have information and forms on how to create a special needs trust. However, there are many laws (state and federal) that govern the creation, funding, use, and termination of a SNT. Thus, it is important to consult an attorney with experience specifically in special needs trust creation to make sure the trust is valid and complies with the laws.
The Right Type Of Trust
There are many types of trusts and often attorneys prefer to create separate trusts for First-Party funds (i.e., trusts that are funded directly by the person with a disability, which may be subject to Medicaid payback rules) and Third-Party funds (i.e., trusts that are funded by parents, grandparents, guardians or other funding sources that are likely not subject to Medicaid payback rules). Knowing the type of trust is key to ensuring the maximum benefit to the person with a disability while still complying with laws.
Ensure The Trust is Legal
Attorneys can also help ensure the trust is created using the language necessary to make it valid and an attorney can help ensure the trust is broad enough to meet the evolving needs of the person as they age. Thus, having an attorney help during the creation of a SNT is invaluable.
Deciding how to handle your child’s financial future can be difficult but having the right information and consulting with an attorney or financial planner who specializes in special needs trusts can go a long way to ease your mind.
Nothing in this blog post should be construed as legal advice. Information in this article is not intended and cannot replace consultation with an attorney specializing in special needs issues.
WRITTEN ON SEPTEMBER 6, 2012 BY Melissa Stuart
Melissa Stuart is an associate attorney at Cohen & Malad, LLP in Indianapolis, Indiana. She graduated J.D., cum laude from Indiana University School of Law, 2011 and was Editor-in-Chief of the Indiana Health Law Review. Prior to joining Cohen & Malad, LLP, Melissa worked for several years at Riley Children’s Hospital in the Christian Sarkine Autism Treatment Center as a Research Specialist.
Special Needs Trusts are a useful tool and a long-term plan for savings; however, they are not always a good fit for everyone. Alternatives to opening a trust include spending down the funds, prepayment of living expenses, and ABLE Accounts.
Other Issues to Consider:
Special Needs Life Care Guide:
Make a copy of this guide and put it in an accessible area for family and caregivers to reference.