TEN REASONS WHY A SPECIAL NEEDS TRUST SHOULD NEVER BE INCLUDED IN A WILL

by Thomas D. Begley, Jr., Esquire, CELA

[Article originally published in The Barrister] Many clients who have a family members with disabilities who are receiving means-tested public benefits, such as SSI, Medicaid, Medicaid Waiver Programs, etc., want to establish a Special Needs Trust for the benefit of that family member so that the family member can enjoy the inheritance and at the same time retain important public benefits. Usually, the Special Needs Trust is included in the parent’s Will.   Generally, this is not the best way to address this situation.  The preferred method is to establish an inter vivos Third Party Special Needs Trust and have the Will leave assets to that inter vivos Trust.  The author cannot think of any reason why it is advantageous to include the Special Needs Trust in the Will. Here are ten reasons why to use an standalone or inter vivos Third Party Special Needs Trust.

1. Contributions from Others.  Frequently, other family members or even friends would like to leave something for the benefit of the disabled individual in the Will of the family member or friend.  If the parent of the disabled individual establishes a Third Party Special Needs Trust in his or her Will but is still living, the Will is not in effect and cannot receive the bequest from the family member or friend.  Conversely, if the parent had established an inter vivos Third Party Special Needs Trust, the family member or friend could leave assets to that Trust in the Will of the family member or friend.
2. Lifetime Gifts.  Occasionally, there are situations where it makes sense for the parent or other family members to fund the inter vivos Third Party Special Needs Trust during the parent’s lifetime.  If the Trust is established in the parent’s Will, this is not possible until the parent dies.  Examples of reasons to fund a Trust during the parent’s lifetime would be for birthday or holiday gifts for the beneficiary. 
3. Parent Predeceases Third Party. Occasionally, a parent will be the beneficiary of a third party’s Will, but will predecease the third party.  For example, the grandparent of a disabled grandchild may die leaving all or a portion of the grandparent’s estate to the parent of the disabled grandchild. If that parent predeceases the grandparent, the grandparent’s Will could provide that if the parent died, all or a portion of the parent’s share would pass to the inter vivos Third Party Special Needs Trust for the benefit of the grandchild with disabilities.  The inter vivos Trust could be incorporated by reference. 
4. Long-Term Care Planning.  A Subtrust can be included in an inter vivos Third Party Special Needs Trust that would serve as a Disability Annuity Special Needs Trust enabling a parent, grandparent or other family member who requires long-term care to fund the Disability Annity Special Needs Subtrust by a lifetime gift without incurring a Medicaid transfer of asset penalty. 
5. Change in Law.  If an inter vivos Third Party Special Needs Trust is established and funded and subsequently the Social Security POMS change or the State of New Jersey enacts legislation governing Third Party Special Needs Trusts, it is possible that the old rules will be grandfathered with respect to the inter vivos Third Party Special Needs Trust.
6. Better Draftsmanship.  It is the author’s experience from reviewing Third Party Special Needs Trusts established by Will and standalone Third Party Special Needs Trusts, that the standalone Trusts almost inevitably contain better textual direction with respect to distributions, authority of the trustee, successor trustee provisions, trust protector provisions, description of the beneficiary’s needs, and future powers to amend or modify the trust instrument.
7. Retirement Plans.  Standalone Third Party Special Needs Trusts usually contain clearer and more effective language pertaining to retirement plans of parents, other family members, or friends.  Again, if a family member or friend predeceases the parent with a testamentary Third Party Special Needs Trust, the retirement account will not be paid to the testamentary Third Party Special Needs Trust because it is not yet in existence.
8. Gift Tax Planning.  If there is a large estate, a standalone Third Party Special Needs Trust can be designed so that gifts can be made to the Trust during the parent’s lifetime to reduce the size of the parent’s estate.
9. The Probate Process.  Probate can take a considerable amount of time in complicated situations, especially when there is a challenge to the Will.  In special needs situations, parents frequently allocate a larger share to the child with disabilities than to other children and, occasionally, even disinherit the other children who the parents feel are able to support themselves. This occasionally leads to litigation, which holds up the administration of the estate.  In the meantime, not only are the probate assets effectively frozen, but non-probate assets, such as life insurance, retirement accounts and annuities, are also effectively frozen.  If there was a standalone Third Party Special Needs Trust, then the life insurance, retirement account, and annuities could be paid directly to that Trust.  A common strategy is for parents to fund a standalone Third Party Special Needs Trust with life insurance.
10. Disability. Unfortunately, a considerable amount of estate planning is done by bank tellers, CPAs, stockbrokers, or lawyers who do not specialize in estate or disability planning but are relatives of the family with the child with disabilities.  If these individuals see a well-drafted, comprehensive, standalone Special Needs Trust, they are less likely to interfere.