SPECIAL NEEDS PLANNING – PART 3

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

[Here are links to Part 1 , Part 2 and Part 4]

Features of a Special Needs Trust

1. Enriches Our Child’s Life.

By establishing the Special Needs Trust, the funds in the trust can be used to enrich the child’s life while at the same time maintaining important public benefits.

2. Asset Not Countable.

The assets in the Special Needs Trust are not countable, and distributions from Special Needs Trusts are not considered income so long as distributions are not made directly to the trust beneficiary.  Distributions are made to a third party who delivers goods are services to the individual with disabilities.  For example, the individual with disabilities or a family member may obtain a credit card.  The trustee and the individual with disabilities or family member agree on a budget.  Items in the budget are charged on the credit card, and the credit card bill and receipts are sent to the trustee for payment on a monthly basis.  Cash is not given to the trust beneficiary, because cash distributions to the beneficiary would reduce or eliminate public benefits.

3. What Can the Special Needs Trust Pay For?

The type of Special Needs Trust being discussed is called a “Third-Party Special Needs Trust,” because it is being funded by assets of someone other than the trust beneficiary.  The trust is usually funded by parents but is often funded in whole or in part by grandparents, other family members, and even friends.  If the beneficiary is receiving SSI, the SSI is intended for food and shelter.  Therefore, any distribution from the trust for food or shelter will reduce the beneficiary’s SSI payment.  The maximum deduction is one-third of the payment plus $20.  Sometimes this reduction is unavoidable, but where possible the beneficiary should use the SSI payment for food and shelter and let the trust pay for other needs.  The trust cannot make gifts but can pay for almost anything else.

4. Life Insurance.

Life insurance is often a good vehicle to fund a Special Needs Trust.  Unfortunately, many parents of special needs children have term insurance because it is cheaper.  The problem with this is that the parents almost always outlive the term, and the insurance disappears.  It is better to have whole life insurance even if the amount is significantly less, because the need is never going to go away.  A married couple can obtain something called “second to die” life insurance.  This is cheaper and usually solves a good part of the funding problem.

Income, estate, and gift taxes must all be considered in designing and drafting a Special Need Trust.

1. Funding on Death. In most cases the Special Needs Trust is not funded until the death of the grantor.  Therefore, income tax and gift tax would not be a consideration, but federal and state estate and inheritance taxes must be considered.
2. Lifetime Funding.

• Income Tax. In order to shift income tax from the grantor to the beneficiary, trusts are sometimes funded with significant assets.  Those trusts cannot be Grantor Trusts.  They are Complex Trusts and any income distributed to the beneficiary is taxed to the beneficiary.  Any income retained by the trust is taxed to the trust at the usually higher trust rates.  These trusts must be irrevocable.
• Gift Tax. If an irrevocable Special Needs Trust is funded during the Grantor’s lifetime and the trust is not a Grantor Trust, then gift taxes must be considered.
• Estate Tax. Estate and inheritance taxes must be considered in connection with Special Needs Trusts.  If the trust is large enough, the grantor may elect to fund it during lifetime while the federal estate tax is high, since the IRS has indicated that there will no claw back if and when the federal estate tax exemption is reduced (i.e., January 2026).

6. ABLE Account.

The Special Needs Trust document can authorize the establishment and funding of an ABLE account.  Money can be set aside in an ABLE account for a child with disabilities.  The ABLE account can be administered by the child, an agent under a Power of Attorney, or a guardian for the child.  Sixteen thousand dollars per year can be deposited into the account, and so long as the total does not exceed $100,000 it does not affect SSI.  However, the maximum earned income contribution to an ABLE account by a disabled beneficiary is now $12,880.  The account requires a payback to Medicaid on death, so it makes little sense to put too much in the account but having some money in the account under the control of the individual with disabilities or a family member does make sense from a control standpoint.  Earnings are also tax-free, but this is a minor consideration since earnings on a small account would be minimal.

The Team

Special Needs Planning involves the assembly of a Team.  The Special Needs Trust Attorney can assist the client in assembling the Team.  Team members include the following:

1. Life Care Planner.

The role of the Life Care Planner is to develop the plan discussed in Special Needs Planning Part 1.

2. Special Needs Trust Attorney.

The Special Needs Trust Attorney can assist the client as follows:

• Directing the client to receive the maximum public benefits for the special needs child.
• Preparing a Supported Decision-Making Agreement between the individual with disabilities and the decision-maker.
• Providing assistance for the special needs individual and the family of the special needs individual in preparing appropriate Estate Planning documents.
• Drafting a Special Needs Trust and assisting with identifying an appropriate Trustee.

The Trustee of a Special Needs Trust will invest the funds under management and make appropriate distributions.

4. Financial Advisor.

Occasionally, the Trustee will delegate financial management to a Financial Advisor with the consent of the client.

5. Nurse Consultant.

The Nurse Consultant will elicit the person with disabilities on a “as needed” basis and arrange whatever care is required.

6. Social Worker/Care Manager.

A Social Worker or Care Manager will visit the special needs individual and be sure that all non-medical needs are being taken care of.  The Social Worker or Care Manager might assist the beneficiary with:

• Monitor the individual’s progress.
• Ensure that the individual’s needs are met.
• Coordinate nutrition and cleanliness programs.
• Make sure that exercise and physical therapy programs are maintained.
• Coordinate any socialization or psychological counseling.
• Ensure that the special needs person has assistive devices, if needed.
• Have a plan and a responsible advocate available to resolve problems in a quick and timely manner, in the event of an emergency.

7. Social Security Disability Appeals.

The individual specializing in Social Security Disability Appeals may be brought on board, if necessary.

8. Special Education Attorney.

A Special Education Attorney may be brought on board on an “as needed” basis.