Estate Planning With Special Needs Trusts
Estate Planning for a child with a developmental disability or with other challenges raises unique planning considerations. No child has the same constellation of symptoms or exactly the same needs. Obviously, any planning needs to be responsive to the particular needs of the child as those needs may evolve over time.
Planning Around The Government Income And Resource Limits
When planning for a child, or other loved one, with a mental or physical disability, it is important to provide financial assistance without endangering their eligibility for government assistance. Other than certain educational assistance programs, most government benefits are means-based. For Supplemental Security Income (“SSI”), for example, there are strict income and asset resource limits to qualify. The income limits vary depending on the state in which the individual lives, her/his living arrangements and other factors. The asset or resource limit for SSI is generally $2,000 for individuals although this may also vary for minor children in single parent households. Medicaid has similar means-based requirements.
Types Of Special Needs Trusts
The basic planning tool is a special needs trust which is designed to hold assets for the benefit of the person with the disabilities without disqualifying him or her from SSI or Medicaid benefits. There are three general types of special needs trusts: a “third party” wholly discretionary special needs trust; a (d)(4)(A) special needs trust, and; a (d)(4)(C) special needs trust. The latter two trusts are named for the statutory provisions in the Social Security Act giving rise to their existence.
All three of these trusts are popularly called special needs trusts (or a SNT). That can be very confusing. Each is quite different, each is designed to address different circumstances, and each has different rules and requirements.” says Jack Beckett, a principal of the Maryland estates and trusts law firm of Franke, Sessions & Beckett, LLC..
The wholly discretionary trust is governed primarily by the Maryland Trust Act with provisions tailored to meet the federal requirements. The (d)(4)(a) and (c) trusts must track the federal statutory provisions but also be consistent with Maryland law. A Maryland special needs trust lawyer should balance the federal requirements with the Maryland substantive law of trusts to help you identify which trust is the right option for you and prepare such a trust with the provisions that will best fit your circumstances.
The Wholly Discretionary Special Needs Trust
The third party wholly discretionary special needs trust can be funded by parents, grandparents or others. It is designed, however, to preserve potential means-tested government benefits. One key to that preservation is that the trust cannot be controlled by the disabled individual or be revocable by him or her. Another requirement is that the third party special needs trust generally may not have a mandated and enforceable distribution provision. It is theoretically possible to have a requirement that a small amount be distributed to the disabled person every month ($100 per month for example) as long as the payment would not be a disqualifying income stream under the government regulations, but such a provision is generally not advised. Additionally, the trust must provide that the beneficiary’s interest cannot be sold, alienated, or transferred by the beneficiary in any way. This is accomplished by the inclusion of a spendthrift clause
Statutory Special Needs Trusts
The other two special needs trusts are usually funded by assets owed to or held by the disabled person. Typical sources of such funds are monies received from a lawsuit recovery or settlement, distributions of child support under a court order, or distributions from an inheritance that was not structured as a third-party special needs trust. Due to a change in the law in 2015, military members and retirees can direct a Survivor Benefit Plan (SBP) for a dependent child to either a (d)(4)(A) or a (d)(4)(C). An SBP cannot, however, be directed to a third-party special needs trust. Neither the (d)(4)(A) nor the (d)(4)(C) count against the beneficiary’s resource limit when his or her assets are evaluated under SSI or Medicaid.
The d(4)(A) trust is generally a privately managed trust either by a family member or by a for-profit trust company. The d(4)(C) is a “pooled trust” managed by a non-profit organization. One benefit of the d(4)(C) trust is the fact that it will be managed professionally and by an organization that will have deep experience in being a trustee for a disabled individual.
Who May Establish a Special Needs Trust?
Only certain individuals can establish a (d)(4)(A) or (d)(4)(C) trust. These individuals are specified by federal law, and include the beneficiary’s parents, grandparents, legal guardian, and a court. One significant difference between the (d)(4)(A) and the (d)(4)(C) is that, historically, federal law permitted the (d)(4)(C) to be established by the disabled person whereas it was not permitted for the (d)(4)(A) trust. (Federal law has since corrected this discrepancy.) Another significant difference is a (d)(4)(A) trust cannot be established for the benefit of an individual age 65 or older, whereas individuals of any age can establish a (d)(4)(C) trust.
Both the (d)(4)(A) and (d)(4)(C) trusts, if properly constructed, will not trigger disqualification under Medicaid or SSI. Parents should decide whether a third-party wholly discretionary special needs trust as well as the (d)(4)(A) and (d)(4)(C) statutory trusts should fit into their overall estate planning and discuss their choice with a Maryland special needs trust lawyer.
A Common Mistake When Planning for a Special Needs Child
Parents often overlook the necessity of going to court to become a disabled child’s guardian when the child reaches legal age – 18 in Maryland. The reason this is often overlooked is because it seems artificial to have to get state court approval of the parent to continue to act for the best interest of the disabled child – something which they presumably have done throughout the child’s lifetime. Nevertheless, this is essential and important to do before a need arises when it may have to be done on an emergency basis. Even if the disabled child has no assets that need management, a guardian may be needed to make the child’s health care decisions.
Create A Letter Of Intent
Aside from the formal estate planning documents, parents with a child with disabilities should consider writing a “letter of intent” to communicate to the trustee the child’s functional abilities, routines, interests, and particular likes or dislikes. This letter should also identify specific physicians and other resources. Professional trustees often complain that trust documents only describe the legal boundaries for the trustee’s actions and never offer insight to the beneficiary as a person and what the settlor of the trust would want the trustee to know. The letter of intent fills that important gap.
Plan for Your Loved One’s Needs With Maryland Special Needs Trust Lawyer
For over 35 years, the law firm of Franke, Sessions & Beckett, LLC has concentrated on the law of estates and trusts – including helping many clients with structuring third party wholly discretionary trusts, (d)(4)(a) and (d)(4)(c) trusts. Planning for loved ones with special needs is an important part of our estate and asset protection planning practice. The core purpose of all estate planning is protecting your intended beneficiaries. Our Maryland estate planning attorneys and staff have the experience, training and knowledge to guide clients through the process to ensure that your goals are met. Call 410-263-4876 today to schedule a consultation at our Annapolis office.