The Supplemental (or Special) Needs Trust was something I felt was looming over me. I had heard it was expensive and complicated, but that wasn’t what was holding me back. Actually talking to an attorney about getting a special needs trust was wrapped up in all kinds of emotions about long-term disability and admitting that there was a strong possibility that my son may not be fully independent as an adult.
I was stuck there. I was stuck in the place of knowing that my son needed financial protections, but not emotionally ready to commit. What if we went through all this and he was able to work?
He was only 5!
Thankfully, my son’s special needs preschool offered a seminar on Special Needs Trusts and I went. What I heard eased so many of my concerns and made me more emotionally ready to take it on.
Special and Supplemental Needs Trusts
So, why do you need a Supplemental Needs Trust?
When your child who is legally disabled turns 18, he or she is entitled to benefits from the government, including SSI (Supplemental Security Income), Medicaid, housing, and other benefits. Individuals may or may not need all that they are entitled to, but they are entitled to benefits, and the ability to qualify for what they do need is contingent on finances.
Right now, the resource limit is $2,000 for SSI. If the total assets (money, property, investments – anything that can be turned into cash) in the name of an adult child with a disability exceeds $2,000, he will not qualify for SSI or he may lose that benefit. If an adult child inherits any assets from you or from other family members that pushes him over that $2,000 limit, he will lose his SSI. In most states, once an individual loses SSI, he also loses Medicaid coverage. It puts individuals with disabilities in jeopardy, because it is difficult and costly to regain SSI and Medicaid once it is lost.
A trust is needed to hold any assets to be used for the benefit of your child, but will not count towards that $2000 limit. Because the trust is its own financial entity, it can hold an unlimited amount of assets, and your child would still qualify for the government benefits he or she needs.
The attorney brought up reasons why a trust is safer than relying on leaving assets to siblings or other family members for the benefit of your child with special needs. A great example is if your other child gets married and you and family members leave assets to them. If that marriage ends, the assets may get divided, leaving your child with special needs vulnerable. What if something happens to your other child, or that child decides that the money should be spent elsewhere? There is really no other way to guarantee that certain assets will be used to benefit your child with a disability, other than having it in a Special Needs Trust.
The trust can be used for anything that the government doesn’t provide, or in place of some (or all) of the government benefits. A trust could pay for clothing, quality of life enhancements, vacations or outings, therapy, health insurance instead of using Medicaid, or staying in the family home instead of housing provided by the government. You name a Trustee (and a back-up Trustee) to manage the assets and to give what is needed to your child.
Setting Up a Trust
There are two types of ways to set up a Special Needs Trust.
1) You set it up and it becomes its own financial “entity” right now. A Federal Identification Number (EIN) is issued by the IRS. If you think Grandma or Aunt Betty are going to leave an inheritance to your child, you may consider setting up the trust to exist while you are still alive and your child is under 18. Also, if the trust is set up, any income that your child may receive from work that she does could be put into the trust, so that she is still able to qualify for SSI and other benefits. Say your teenaged child has a part-time job and she puts the money into a savings or checking account. If that account grows to be $2,001 (the current limit is $2,000), she will lose her SSI.
2) You set up the trust in your Last Will and Testament, which is called a Testamentary Supplemental Needs Trust. I didn’t know this option existed and it made me feel really good for two main reasons. My husband and I didn’t have wills and I knew we needed those anyway. But, also not having the trust come into existence until the second parent dies allows you to “see what happens.” Maybe your child will be more independent than you think. Maybe you don’t have the assets to put into a trust now, so the only assets that will go into a trust are the ones that your child will inherit from you anyway. Language is built into your will so that the trust is created and any assets you leave your child with special needs are left to the trust.
I would recommend that you work with an attorney who is versed in Supplemental (Special) Needs Trusts to guide you through the process. I tried to set one up in one of those online will programs, and it wasn’t close to being specialized enough. Even many estate lawyers are not capable of setting one up properly.
Moreover, if you do not have a will already, you will also need to make those decisions, such as who will take care of your minor children and handle your remains. I honestly liked having my hand held a bit with the process, and it helped to be able to ask questions. This is tough to think about under the best of circumstances, and we don’t exactly have the best of circumstances.
No matter which type of trust you set up, you may want to include language to dissolve the trust if it is not needed. We definitely wanted the trust to be available if something tragic happened to my husband and me while our son was still a minor. But, if my son were able to be independent as an adult, then he wouldn’t need the trust. Our wills have a provision in them called “Partial Termination Prior to Death.” The trust can be partially terminated if our son is substantially gainfully employed for a consecutive two-year period, an attending physician certifies in writing that the disability no longer limits him from being substantially gainfully employed, and the Trustee determines that the facts warrant early termination. The trust is then distributed to our son 10% a year for each year of consecutive substantial gainful employment. If there is a break in employment, distribution is revoked and the requirements need to be met anew. If there is no break in employment, the trust terminates with the distribution in the last year. Even if the trust never gets dissolved, it made me feel better that it could be.
The good news is that like any legal document, what is included today can be updated and changed as needed. We set up the Testamentary Supplemental Needs Trust, but if my son is able to work at 18, we may have to set up a Supplemental Needs Trust while we are alive, and modify our wills to name the newly created trust as the beneficiary.
Expect to pay several thousand dollars to set up a Special Needs Trust. If someone offers to set one up for less than $1000, be very wary, as they may not be establishing a full, legally protective trust.
- If you set up a testamentary trust, be clear with all the relatives about not leaving your child any assets.
- Some people set up whole life insurance policies on their children, which have a cash value. If you have one, cash it out. Calculate what you put in and what the cash value is now, as it is most certainly much less, if that isn’t enough to get you to stop contributing, then know that any assets held in that policy in your child with special need’s name count as his assets.
- Be wary of taking out a whole life policy on yourself to fund the trust, because there is a good chance that it will be marketed to you. Whole life policies are expensive and you will have to pay those premiums for the rest of your life in order for it to really be an asset. Once you miss a payment, the policy ends and you are left with a cash value that is very likely to be significantly less than you put into it, and significantly less than the projected value. Do your homework and definitely do the math on whole life insurance. Term life insurance is often a better way to go.
- Change the beneficiaries on any life insurance policies, 401K/403B/IRAs or any investment accounts you have. Do not name your child with special needs or “all my children” as the beneficiary or secondary beneficiary.
- 529 College Savings Plans. We set up a 529 plan for my son when he was an infant, before receiving a diagnosis. A 529 plan is set up in a parent (or relative’s) name and the beneficiary is the child. Because this kind of account isn’t held in the child’s name, it doesn’t count as your child’s assets. 529 plans can be used on any kind of secondary education, such as colleges and trade schools or programs. There are special needs programs out there and presumably there will be more in the future. Normally, if you withdraw money from a 529 plan for purposes other than a qualified education program, there is a 10% penalty on from the Federal government. However, if the child is disabled, that penalty is waived. You will need to pay capital gains taxes on the growth of the account, and you may have to pay back any taxes that were waived by your state when you made the deposit into the account. (Example: if you put in $2000 and the account is now worth $3000, you will have to pay capital gains taxes on the $1000 gain.)
- As your child approaches 18, you may need to consider whether or not you need to be appointed as her legal guardian to act on her behalf in legal, financial and medical situations. Without guardianship, your child will have to act on her own behalf.
You must be thinking what a downer this all is. I am not going to lie–even after starting the process, it took us a good nine months or so before we really did it all because it is tough. But, once we got all this paperwork done and I received my big binder filled with all our directives, I felt really secure. It forced us to make some hard decisions and talk to relatives and friends and ask if they would act on our son’s behalf. It is very comforting to know who would be there for my son if needed.
Another unintended consequence of this process was a complete change in how I think about money. It forces you to really think about the future and how what we save and the assets we build need to last for our lifetime and support our son through his. I am far more focused on saving money than spending it now. I started to think more about needs and wants, and if purchases are really necessary or not. As a couple, we are also more focused on building our “nest egg.”
In the future, we may no longer need expensive and complicated Special Needs Trusts. The ABLE Act is currently before Congress, and if passed, it would allow for the creation of tax-free accounts specifically for the purpose of assisting people with disabilities. These accounts would be much like 529 college plans in terms of creation, management, and distribution, but with a wider ability to use the funds. The money in these accounts would be disregarded when determining eligibility for Medicaid and most other federal benefits.