Special Needs Trust – Caring for Those who Need Protection the Most

I don’t often talk about my family at work.  11 years ago, I noticed my 2 year old son did not react well to loud noises and was not starting to speak.  Concerned we took him to a doctor who performed extensive testing.  One afternoon I received a call by the doctor to meet me at her office.  She explained to me our son had a genetic disorder called Trisomy 8, a cousin to Trisomy 21 (Down Syndrome).  While unlike Downs, Trisomy 8 children typically do not have any physical trademark appearances.  They do, however, exhibit symptoms similar to many children on the autism spectrum.  As you can imagine, the hopes and dreams of my 2 year old son flashed before my mind, and I began not only to worry about the many activities and experiences he would miss out on, but the problems he would face going into adolescence and adulthood.

Over the past 11 years I have come to love my son’s challenges.  Although big enough to be a linebacker, he will never play the game.  What is lost, however, is replaced with one humor, positive attitude, and a great personality.  Everyone smiles when my son comes into a room.  The kid makes us all laugh.  I’m not sure I would change his disability if I could cure it at this point because of the wonderful blessing he is to our family and community.

As we all are concerned for our children, we must pay close attention to those who need us the most.  The vulnerable, innocent, and naive.  What would happen to these precious individuals should something unexpected occur to us?   There are several questions to consider, such as: what kind of assistance would your child require, what are the costs involved in providing this assistance, and what things would effect your child’s current benefits? These considerations can be addressed in a “Special Needs Trust.”

Special needs trusts are created to help manage funds for the person with special needs and help preserve their eligibility for public benefits. The trust acts as a supplemental resource to any assistance the child receives. The trustee of the special needs trust may use the funds for a variety of purposes other than basic needs including home health care, education, or entertainment.

Special needs trusts can either be “third-party” trusts or “self-settled” trusts. Third-party trusts are funded with assets not owned by the beneficiary. These assets typically come from family members or friends. Self-settled trusts are funded with the beneficiary’s assets such as an inheritance or personal injury settlement. Self-settled trusts are subject to a “payback” requirement for Medicaid while third-party trusts are not. Typically, a parent will set up a third-party trust for a child with special needs.

A parent may set up the trust either during their lifetime or after the parent dies by creating it in the parent’s estate plan. The first option is called a stand-alone trust where the special needs trust is created outside of the grantor’s primary living trust. The second option is called a testamentary trust in which the special needs trust is created within the grantor’s living trust and becomes effective upon the grantor’s death. One major advantage of a stand-alone trust is that anyone can make gifts to the trust for the benefit of the beneficiary. However, the primary advantage of placing the special needs trust within the parent’s living trust is that it can cost less because only one trust document is being drafted rather than two.

Another consideration in creating a stand-alone special needs trust is whether it should be revocable or irrevocable. If a stand alone trust is revocable then the grantor can change it at any time to fit the circumstances of the child. However, having a revocable trust also means that the trust is included in the grantor’s estate at the time of the grantor’s death, which can create estate tax issues. On the other hand, an irrevocable trust is one that cannot be changed and its assets are not included in the grantor’s estate for tax purposes.

Many people fear that when a disabled child receives a lump sum of money that the child will lose any public benefits he or she receives. However, a properly drafted special needs trust will ensure the child does not lose any benefits but rather has a supplemental resource for his or her care. Thus, a parent can rest assure that the funds in the special needs trust will be used to improve the child’s quality of life.

If you are considering a special needs trust for your loved one contact an estate planning attorney to discuss the benefits of a special needs trust in further detail.

Greg Christiansen
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