Special Needs Trusts
Protect Your Child's Financial Future
Kevin Urbatsch, Attorney and Stephen Elias, Attorney
April 2013, 5th Edition
Create a special needs trust for a loved one's care and get peace of mind
If you care for a child or other loved one with a disability, you’ve no doubt thought about what will happen when you’re no longer able to give that care. Fortunately, there's a simple solution to this dilemma -- create a "special needs trust."
Special Needs Trusts shows you how to leave any amount of money to your disabled loved one -- without jeopardizing government benefits. It provides plain-English information and forms you need to create a special needs trust.
Funds in a special needs trust can make a big difference in quality of life by paying for:
- annual independent check-ups
- personal care attendant or escort
- vehicles and transportation
- essential dietary needs
- materials for recreation
- trips or vacations
- athletic training or competitions
- and much more.
Special Needs Trusts also provides a formal letter to the trustee, which explains this very important role, and a personal letter to the trustee, which provides crucial information about your loved one. This edition has been thoroughly revised to reflect the latest changes in the law, including updated eligibility requirements for government benefits, current resources, and an experienced perspective about when to make a special needs trust on your own and when to seek the services of an attorney.
“‘What will happen to our son or daughter when we are no longer here?’ Special Needs Trusts provides parents with an answer.”-Roslyn Brilliant, Former Executive Director, Disabled and Alone/ Life Services for the Handicapped, inc.
- Special Needs Trust
- Trustee's Duties Letter
- The Florida Witness Statement
Kevin Urbatsch is a principal of the boutique estate planning firm, Myers Urbatsch P.C. in San Francisco, California. He is a nationally recognized expert in the unique planning needs of individuals with disabilities and their families. Mr. Urbatsch is a charter member of the national organization, the Academy of Special Needs Planners. He writes and is a frequent lecturer both locally and nationally on planning for persons with disabilities, primarily concerning special needs trust drafting and administration.
Until his death in late 2011, Stephen R. Elias was a practicing attorney, active Nolo author, and president of the National Bankruptcy Law Project. He was an important part of Nolo for more than 30 years, and was the author or coauthor of many Nolo books, including Bankruptcy for Small Business Owners. Other titles include Special Needs Trusts: Protect Your Child's Financial Future, How to File for Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, and Legal Research: How to Find and Understand the Law. He was also one of the original authors of Nolo's bestselling WillMaker software. Steve held a law degree from Hastings College of Law and practiced law in California, New York, and Vermont before joining Nolo in 1980. He was featured in such major media as The New York Times, The Wall Street Journal, Newsweek, Good Morning America, 20/20, Money magazine, and more.
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TABLE OF CONTENTS
Your Legal Companion for Special Needs Trusts 1
Planning for a Loved One With Special Needs 3
Why You May Want to Make a Special Needs Trust 4
How a Special Needs Trust Can Help 9
Who Can Benefit From a Special Needs Trust 11
Who Can Set Up a Special Needs Trust 12
Alternatives to a Special Needs Trust 13
How a Special Needs Trust Works - Nuts and Bolts 15
Who Can Benefit From a Special Needs Trust 27
Someone With a Permanent or Severe Disability Who Is Unable to Earn a Living 28
Someone Who May Get Better 30
Someone Who May Need a Special Needs Trust Later 32
Someone Who Is Eligible for Medicare or SSDI 33
Someone Who Needs Assistance Managing an Inheritance 35
How Trust Funds Can (and Cannot) Be Used 37
SSI Income and Resource Limits: An Overview 38
Assets in the Special Needs Trust 42
What Special Needs Trust Funds Can Be Used For 42
Gifts of Cash 47
Payments for Food or Shelter 49
Gifts of Food or Shelter From Other Sources 52
What the Trustee Should Not Pay For: Countable Assets 53
Getting Money Into a Special Needs Trust 55
What Assets to Put Into a Special Needs Trust 56
How Much Money Will Your Loved One Need? 57
How to Leave Money to a Special Needs Trust 59
Don't Commingle the Beneficiary's Property With Trust Property 68
The Trustee's Job 71
The Trustee's Basic Duties 72
Working With a Guardian or Conservator 74
Investing Trust Property 75
Spending Trust Money for the Beneficiary 78
Managing a Remainder Beneficiary's Property 85
Preserving Eligibility for SSI and Medicaid 86
Paying Taxes 90
Going to Court 91
The TrusteeÕs Duties Letter 92
Choosing Trustees 93
An Overview of Your Options 94
Signing Up for a Pooled Trust 95
Picking the Ideal Trustee 96
Naming the Initial Trustee 104
Naming Successor Trustees 106
Naming Cotrustees 107
Naming a Professional or Corporate Trustee 111
Using a Trust Protector or Trust Advisory Committee 113
Joining a Pooled Trust 117
An Overview of Pooled Trusts 119
Can You Use a Pooled Trust? 121
How Pooled Trusts Work 126
Joining a Pooled Trust 133
What Happens When the Trust Ends 137
Creating Your Special Needs Trust 139
Drafting the Trust Document 141
Making the Trust Legal and Effective 169
Keeping the Special Needs Trust Up to Date 169
Sample Special Needs Trust 170
Finalizing and Funding Your Special Needs Trust 183
Making Your Trust Legal 184
Opening the Trust's Deposit Account 189
Incorporating the Trust Into Your Estate Plan 190
Where to Get More Help 195
Certified Financial Planners 202
SSA and Medicaid Personnel 204
Keeping Up to Date 204
Pooled Trusts 221
Letter to Trustee 233
Letter to Trustee 235
Managing a Special Needs Trust 236
Documenting the Authority of Successor Trustees 251
Sample Beneficiary Information Letter 255
Using the eForms 269
Using the RTFs 270
Using the PDF 271
List of Forms 271
Planning for a Loved One With Special Needs
Why You May Want to Make a Special Needs Trust.................... 4
Preserving Health Care for People With Disabilities................. 4
How Inherited Money Can Make SSI and Medicaid Unavailable................. 8
How a Special Needs Trust Can Help........................................... 9
Who Can Benefit From a Special Needs Trust........................... 11
Who Can Set Up a Special Needs Trust..................................... 12
Alternatives to a Special Needs Trust.......................................... 13
Leaving Money to a Friend or Relative.................................... 13
Leaving Money Directly to Your Loved One........................... 14
Using a Pooled Trust................................................................ 14
How a Special Needs Trust Works—Nuts and Bolts.................. 15
When the Trust Takes Effect................................................... 16
Who Can Give Property to a Special Needs Trust.................. 17
What Types of Property Can Be Held in the Trust.................. 18
How Assets Get to the Trust.................................................... 19
How Trust Assets Can Be Used.............................................. 19
The Trustee’s Role................................................................... 20
Terminating the Special Needs Trust...................................... 23
illions of us love and care for someone who lives with a disability—a son with Down syndrome, a daughter with cystic fibrosis, a niece with severe autism, a grandchild with schizophrenia, a spouse with multiple sclerosis. Such a disability usually means your loved one will require long-term support and medical assistance under the Supplemental Security Income (SSI) and Medicaid programs.
This chapter introduces the special needs trust—a way to leave property to a loved one with special needs without jeopardizing those crucial SSI and (especially) Medicaid benefits.
Why You May Want to Make a Special Needs Trust
Special needs trusts are powerful tools that can be used to:
protect the assets of a loved one with a disability, while retaining eligibility for needed government benefits for health care and financial assistance
protect your loved one with special needs from predators who target young or vulnerable individuals
provide guidelines for how your loved one with special needs should be supported to enhance his or her quality of life
name the right people to manage money and advocate for your loved one
protect your loved one from claims of divorced spouses or creditor claims (such as car accident plaintiffs), and
protect your loved one from making poor financial decisions due to lack of capacity, immaturity, or good nature—such as giving money away to strangers.
Preserving Health Care for People With Disabilities
One of the primary reasons to protect the inheritance of a person with a disability is to maintain eligibility for his or her health care coverage. Health care and caregiving costs can be the two most expensive needs for a person with a disability. And these needs must be planned for when leaving an inheritance.
There are really three health care systems in America: the private system, Medicare, and Medicaid. These three systems share doctors, hospitals, and other medical resources, but each provides access to these resources in radically different ways. Here is a brief description of each:
Private health care. The private health care system is most frequently available as an employment-related benefit. Great, perhaps, for working people, but usually not available for those with disabilities after they are no longer able to stay on their parents’ health care plans. And paying for private health care individually has rarely been an option because health insurance companies consider nearly all people with disabilities ineligible for coverage due to their “preexisting” conditions. The new Affordable Health Care Act (sometimes called Obamacare) does away with this limitation. Thus, when this law goes into effect (January 1, 2014), it may be possible for persons with disabilities to obtain insurance for private health care.
Medicare. Medicare is a government-run health care system that pays for most medical services (but only very limited long-term and in-home care) required by people with disabilities who are eligible for Social Security or Social Security Disability Insurance (SSDI) benefits. A person need not be poor to get Medicare benefits, but because eligibility for Medicare is based on work history, many people with disabilities fail to qualify for coverage.
Medicaid. Medicaid is a state-managed program that pays for virtually all health care delivered to people who don’t have private insurance and who don’t qualify for Medicare. To get Medicaid you must be classified as either “disabled” or older than age 64. In most states, you also must be poor enough to qualify for SSI—an income-support program designed exclusively for people with limited income and few resources.
For the many people with disabilities who don’t qualify for Medicaid, health care costs cause serious financial complications. For example, if parents leave money directly to an adult child with a disability, the gift—if over $2,000—will disqualify the child from SSI and so from Medicaid until the money is used up. This is where the special needs trust comes in. It allows a person with special needs to enhance his or her quality of life with money and assets received from others without losing SSI and Medicaid.
Special needs trusts also provide the trust maker an opportunity to:
leave instructions about how to use the inheritance (which helps to protect the beneficiary from financial predators), and
decide when a trustee should hire an advocate or caregiver for the beneficiary.
In other words, the special needs trust can be viewed as a parent (or loved one) replacement when that person is no longer there to provide necessary support and guidance.
Medicaid Eligibility Rules
Within limits set by federal law, each state can determine who is eligible for its Medicaid program. In most states, someone who is eligible for SSI is also automatically eligible for Medicaid. (Some states give Medicaid a different name—for example, Medi-Cal in California and MassHealth in Massachusetts.)
In 11 states, however, eligibility for Medicaid is determined separately from eligibility for SSI. In these states, the income and resource limits for Medicaid are either roughly the same as for SSI or somewhat lower. So someone could be eligible for SSI but not for Medicaid. These states are listed below. They’re called “209 states” after a section of the Social Security Act that allows states to determine Medicaid eligibility separately.
This book assumes that someone who is ineligible for SSI because of excess income or resources is also ineligible for Medicaid. However, in most states, a person with excess income or resources can become eligible for Medicaid by spending down the resources or excess income. And a person with disabilities who does not qualify for SSI could still qualify for Medicaid by being determined to be “medically needy.”
Medicaid and SSI Eligibility: State Differences
Eligibility for SSI and Medicaid determined separately (“209 states”)
Medicaid for all SSI recipients, but must separately apply to Medicaid agency (“SSI Criteria States”)
Eligibility for SSI same as eligibility for Medicaid (“1634 states”)
The Commonwealth of the Northern Mariana Islands
All other states and the District of Columbia
For more information about Medicaid eligibility requirements in a 209 state,
How Inherited Money Can Make SSI and Medicaid Unavailable
Inheriting money seems like a good thing. But for someone who relies on SSI and Medicaid, receiving an inheritance can have a disastrous side effect: losing support and, perhaps more important, health care. That’s because the SSI and Medicaid programs are available only to people who have low incomes and few resources.
To qualify for these programs, a person’s monthly income usually must be no more than about $650 to $1,000 (it varies from state to state), and the person must own less than $2,000 worth of liquid assets (bank accounts, securities, and the like) and many other types of property. Someone whose property is worth more than the limit is not eligible for benefits. However, importantly, the value of the person’s home, car, personal effects, and household furnishings are not usually counted and are considered exempt.
EXAMPLE: John’s daughter Yolanda was born with cerebral palsy and will likely need lifetime medical benefits under the Medicaid program. John wants to provide for Yolanda after his death but has been cautioned that leaving her property might disqualify her from Medicaid and support under SSI.
John is right to be concerned. An inheritance that would cause Yolanda to exceed the SSI resource limit would probably also make her ineligible for Medicaid. (Most states operate under this rule, as discussed above.) Yolanda would likely see the property she inherits quickly evaporate in a blizzard of medical bills and living expenses until she once again became eligible for those programs and then had to live a bare-bones existence with no assets to enhance her quality of life.
A person with a disability who comes into money must either put the money in a trust (a first-party special needs trust or pooled trust) or spend it—or at least enough of it so that what’s left doesn’t exceed the resource limit of $2,000—before reapplying for SSI and Medicaid benefits. The money doesn’t have to be spent on support or medical care. However, the money should not be given away. If a person were to give away the money, he or she would be disqualified from SSI for up to three years and from Medicaid for up to five years.
How a Special Needs Trust Can Help
How, then, can you make sure that your loved one receives the full benefit of your inheritance without losing eligibility for Medicaid and SSI? The answer is a third-party special needs trust.
The beneficiary of a properly drafted special needs trust doesn’t have a legal claim to property in the trust. This means that the money isn’t counted as the beneficiary’s resource and so it doesn’t interfere with eligibility for benefits. The funds from the trust can be used for your loved one’s benefit for any good or service. However, if the trust pays for food or shelter it may reduce how much he or she receives from SSI. Generally, this is a good trade-off because the small loss of SSI is more than offset by having a better place to live or enough food to survive. However, these rules vary from state to state, so be sure to understand your state’s rules about using funds from third-party special needs trusts. To learn the rules in your state, you can contact your local Social Security agency or an attorney experienced in special needs planning. See Chapter 10 on how to find such an attorney.
EXAMPLE: Janine, 45, an only child, has had schizophrenia since childhood. She is able to function under heavy medication, but she cannot work and depends on SSI for her income and Medicaid for health care costs. Janine’s sole surviving parent, Helen, wants to leave Janine her property, which consists of a house and assets worth $75,000.
Helen creates a special needs trust for the benefit of Janine, naming herself as trustee to manage the trust while she is alive. Helen writes her will to state that her property should pass directly to the special needs trust rather than to Janine herself. When Helen dies, the house and liquid assets are passed to Jim, the person Helen has named to succeed her as trustee (the successor trustee) in the trust for Janine.
In his new role as trustee, Jim allows Janine to live in the house, liquidates the other assets into cash, and adds the cash to the trust bank account Helen opened when she created the trust. Jim uses the trust funds to pay for items that are not counted by SSI and Medicaid. Because Janine has no control over how the trust money is spent, the money is not counted as a resource by SSI or Medicaid. She gets to keep all of her SSI and Medicaid and gets to use the money in the trust to pay for things and services to enhance her quality of life.
Do you need a lot of money to set up a trust? No, though you may decide that a trust isn’t worth the trouble if you don’t expect that you (or anyone else) will leave money or other assets to the beneficiary. Typically, you would draft the trust and name yourself as trustee of the special needs trust and either not place any money in trust or make an initial deposit of about $500 in a trust bank account. Be careful: Some states do not allow a trust to be established without any money being added to it. So it is usually best to open a small bank account in the name of the trust. Then after you die, you leave additional property to the trust through your will, revocable living trust, insurance policy, or beneficiary designations. You would also encourage the beneficiary’s other relatives to leave money or property to the trust.
Even if the trust ends up with only $5,000 or $10,000, it may be well worth creating because even that little amount of money can be stretched over a long period of time. If the successor trustee (the person you named to serve as trustee after your death) has even $100 a month over five years to spend, it could make your loved one’s life easier.
Who Can Benefit From a Special Needs Trust
Third-party special needs trusts can benefit those of any age who have disabilities that qualify them (or may qualify them) for SSI and Medicaid benefits. They may also be useful for people with disabilities who do not have the capacity or capability to manage their own assets. If you think a loved one may at some time need SSI or Medicaid, or may need help in managing assets, consider creating a third-party special needs trust like the one described and provided by this book.
To determine whether someone may be eligible for government public benefits, you need to know at least the basic rules of the programs. The federal programs that provide assistance to adults with disabilities who are younger than 65 focus almost exclusively on whether someone has the ability to be gainfully employed. In other words, employability defines whether or not someone is “disabled”—at least for the purpose of qualifying for federal benefits. A person doesn’t have to actually be working. It is their ability to work and not their actual work that determines eligibility.
For SSI purposes, disability is determined under a complex set of criteria fashioned by the Social Security Administration. Generally, the disability must be severe and be expected to last longer than 12 months. Some conditions are considered to be automatically disabling—Down syndrome, for example. Others (like an amputation) require that a number of factors be taken into account, including age, work experience, and the type of function affected by the medical condition.
Chapter 2 discusses disability in more detail, and also discusses some other situations in which you may want to set up a special needs trust for a loved one.
Who Can Set Up a Special Needs Trust
Most articles on special needs trusts speak to a parent or grandparent leaving property to a disabled child or grandchild. However, third-party special needs trusts can work for individuals of any age and relationship. You don’t have to be the beneficiary’s parent or any other relative to set up a third-party trust.
Older couples sometimes set up special needs trusts for the survivor, to take effect when one spouse or partner dies. However, if the couple is married, these types of special needs trusts must be established through a will and cannot be established during life or through a revocable living trust.
EXAMPLE 1: Gavin and Denise, both 70, have been married for the past 20 years. Denise has been diagnosed with Alzheimer’s disease and will need Medicaid in the near future. Gavin creates a special needs trust in his will for Denise, naming a friend as trustee. In his will, Gavin leaves $75,000 to the trust, to be used for Denise’s benefit. When Gavin dies, the trust will be set up to supplement Denise’s SSI and Medicaid benefits with money from the trust by paying for items not covered by those programs.
EXAMPLE 2: Rolf and Juanita are both in their 60s and live together but are not married. Rolf suffers from severe rheumatoid arthritis and has been receiving SSI and Medicaid for ten years. Juanita has a stock portfolio worth $50,000 in her name alone. She wants to leave the stock to Rolf but doesn’t want him to lose his SSI or Medicaid. Juanita creates a third-party special needs trust naming herself as trustee and uses a transfer-on-death beneficiary designation to leave the stock to the trust. When Juanita dies, title to the stock passes to the trust and the person Juanita has named to succeed her as trustee can manage the stock to enhance Rolf’s quality of life. Note, however, that if Rolf and Juanita get married, she must create a new special needs trust by will.
You can also set up a special needs trust for someone to whom you’re not related at all.
EXAMPLE: Agnes, age 75, leads a simple life in the house she grew up in. She puts in volunteer time at the local Boys and Girls Club and The Arc (an organization dedicated to the developmentally disabled). Unbeknown to the community, Agnes is worth several million dollars because of property she inherited from her father and mother. She gives handsome annual donations to the groups she works with, but has never given much thought to how to leave her property.
When Agnes learns about special needs trusts, she decides to create special needs trusts for 12 disabled children she has grown close to in her volunteer work. In her will, she directs that at her death, each trust will receive an equal share of her property. If during her life she meets other children who she wants to include, she can make arrangements to include them as well.
Alternatives to a Special Needs Trust
Special needs trusts aren’t the right solution for every family. Trusts can cost time and money to administer, and the person serving as trustee may be called on to make difficult decisions about investing and spending trust assets.
Leaving Money to a Friend or Relative
Rather than rely on a special needs trust, you may be inclined to leave some money to a friend or relative who agrees to watch out for your loved one’s needs after your death.
Unfortunately, this informal approach has several serious downsides. The main problem is that because the person to whom you leave the property will own it outright; there is no way to ensure that the money will end up benefiting your loved one, no matter how honorable the intent at the outset. For example, the money would be subject to that person’s creditors in a lawsuit or bankruptcy. Or the property could pass to that person’s heirs if he or she suffers an untimely death. Or it could go to a spouse in the event of a divorce. Also, because the laws that govern trustees (described in Chapter 5) won’t apply, if the person spends the money on a new car instead of on your loved one’s needs, there is nothing that anyone will be able to do about it.
If you don’t expect to leave much property to your loved one, this approach may be preferable to setting up a trust that will last only a year or two before the money has been spent. You could attach a letter to your will or living trust explaining what you are doing and request that the money be spent in a way that doesn’t interfere with your loved one’s SSI and Medicaid benefits. However, this is not preferred if you want the most protection for your loved one with special needs.
Leaving Money Directly to Your Loved One
Leaving money directly to a person with a disability will almost certainly eliminate his or her eligibility for SSI and Medicaid. It also may have a devastating result if that person lacks the capacity to manage money. The only time it may be better to leave property directly to your loved one with a disability is if that person is unlikely to ever qualify for SSI and Medicaid and can be trusted to manage the funds.
Using a Pooled Trust
If you don’t want to set up your own special needs trust, you may be able to join an existing “pooled trust.” Almost every state has at least one nonprofit organization that operates this type of trust, in which gifts to many disabled beneficiaries are combined so that they can be efficiently and professionally managed. The trustee invests and spends funds for the beneficiaries without affecting their eligibility for SSI and Medicaid. If you sign up for one of these pooled trusts, you can leave the trust details to them. Chapter 7 discusses pooled trusts in detail.
Look to the glossary for help with legal terms. In classic plain-English Nolo style, this book explains a complicated legal topic with a minimum of legalese. However, talking about legal things requires at least some use of legal terms, and when that’s necessary, we want to make those terms as clear as possible. So, in addition to having legal terms defined in the text, this book also provides a glossary of legal terms for your reference. You’ll find the Glossary between Chapter 10 and Appendix A.
How a Special Needs Trust Works—Nuts and Bolts
A special needs trust is an arrangement under which a person (called the “grantor” or “settlor”) places property in the hands of a manager (the “trustee”). Typically, the grantor of a special needs trust names himself or herself as trustee and another trusted person successor trustee. The grantor serves as trustee until he or she dies, becomes incapacitated, or resigns; at that time the successor trustee takes over. Each person who serves as trustee is legally obligated to follow the terms of the trust document to use the property for the benefit of the person with a disability identified in the trust document (the “beneficiary”).
EXAMPLE: Albion (the grantor) creates a special needs trust for the benefit of his daughter Chloe (the beneficiary). Albion names himself as trustee and his sister Rosie as successor trustee. Rosie will take over when Albion dies, becomes incapacitated, or resigns.
All special needs trusts are defined by two basic characteristics:
The trust document states that the beneficiary with a disability cannot direct the use of the funds in the trust for his or her support or maintenance.
The trust document expressly states that the beneficiary with a disability cannot revoke or terminate the trust.
By including these two provisions in the trust document, you ensure that the Social Security Administration (SSA) won’t consider the property in the trust as a resource available to the beneficiary.
Of course, the typical special needs trust contains many more words to deal with various events that may arise. For instance, what happens if the beneficiary recovers and is no longer concerned about SSI and Medicaid eligibility? Or if the beneficiary dies, leaving a lot of property in the trust? These and other issues can be resolved by including basic statements of intent in your trust document. (Chapter 8 takes you step by step through all the major issues and offers plain-English provisions to address each of them.)
When the Trust Takes Effect
This trust will take effect when you sign it and have it notarized. Not long after that (when you get the trust’s tax identification number from the IRS), you can add a little cash to the trust by opening a bank account with a minimal deposit. Then you can leave additional property to the trust at your death through a will, living trust, or beneficiary designation or another estate planning document. It is possible to put additional property into the trust while you are alive. However, see an experienced estate planning attorney or tax professional for help, as putting large amounts of personal property or real estate into the trust during your lifetime could have serious estate and gift tax implications.
EXAMPLE: Barbara’s daughter Kristin suffers from schizophrenia. Barbara, at age 55, creates a special needs trust for Kristen, opens a bank account with $500, and drafts a will that leaves $100,000 to the special needs trust. Twenty years later, both Barbara and Kristin are still alive. Barbara no longer has $100,000 to leave to the trust, but she does own a house. She creates a revocable living trust, places her house in the trust, and includes language in the trust instructing the trustee who will take over at her death (the successor trustee) to deed the house to Kristin’s special needs trust. A year later Barbara wins $25,000 at a local casino. She deposits that money in the special needs trust bank account. Barbara is certain that she will never need the $25,000 for her own care. A year later Barbara dies. The special needs trust will now have her house and the casino winnings (plus interest) to provide for Kristin’s needs.
Keep an eye on the federal gift tax. The federal government limits the amount of tax-free gifts you can make in your lifetime. This includes gifts you make to a special needs trust. However, the limit is high—over $5 million—so most people don’t need to worry about avoiding gift tax. This exemption amount can change however, and it is tied to the estate tax. So, if you expect to leave millions of dollars as gifts either during your lifetime or at your death, it makes sense to keep tabs on this tax. To learn more, go to the Estate & Gift Tax section of Nolo.com. And if you are concerned that this tax might apply to your situation, see an attorney or a tax professional for advice.
Revocable Living Trusts: The Basics
Revocable living trusts have become a common estate planning tool. They are a private way to legally pass property without the delay and expense of a probate court proceeding that wills often require. In the trust document you name yourself as trustee to manage the trust during your life and appoint a successor trustee to take over at your death. In the trust you also state who should inherit trust property. Because the trust is revocable, you—the grantor—can amend the trust or revoke it completely during your life.
By comparison, the third-party special needs trust in this book is an irrevocable trust. This means that you can’t revoke it and you can amend or terminate it only under specific circumstances provided for in the trust itself. If you wish to completely change a third-party special needs trust, you simply create another special needs trust and amend your living trust to leave assets to the new special needs trust.
To learn more about living trusts and other types of trusts, go to the Estate Planning section of Nolo.com.
Who Can Give Property to a Special Needs Trust
Anyone (except the person with a disability) can contribute property to a third-party special needs trust. Although these trusts are most often created by parents for their children, you don’t need any family relationship to create or give money to a trust for someone. And there is no limit to the number of trusts that may be created for a particular beneficiary.
EXAMPLE: Jennifer’s cousin Harvey wants to leave her some money. Instead of leaving the property directly to Jennifer, he creates a special needs trust for her and names Jennifer’s mother, Helen, as trustee (after getting her agreement to serve). In his will, Harvey leaves $20,000 to the trust.
Jennifer’s close friend Ruth also wants to give Jennifer some money—both as a gesture of friendship and because she is making gifts as part of a plan to get her estate under the estate tax threshold. Ruth creates a separate special needs trust, names Jennifer’s mother, Helen, as trustee, and transfers a $13,000 CD into the trust.
Jennifer’s aunt Frieda wants to leave Jennifer $15,000. Rather than create yet another special needs trust, Frieda uses her will to name the trust created by Ruth for Jennifer as the recipient of the $15,000.
What Types of Property Can Be Held in the Trust
Virtually any type of property can be held in a special needs trust, including real estate, stocks, collections, a business, patents, or jewelry. But because the primary purpose of a special needs trust is to use cash money to pay for items that aren’t provided by SSI or Medicaid, special needs trust documents typically give the person serving as trustee authority to sell tangible items (cars or jewelry, for example) to raise cash. Whether or not the trustee sells property will depend on:
the significance of the items to the beneficiary, and
the likelihood that the assets will appreciate in value (if they won’t, it’s better to convert them to cash that can be invested elsewhere).
For instance, a home or an heirloom ring might be important to the beneficiary, and the trustee probably wouldn’t sell them. A valuable coin collection might be likely to appreciate in value, warranting keeping it in the trust as long as possible. On the other hand, jewelry that is of little interest to a beneficiary might as well be sold, with the proceeds invested in an asset that will produce income. Clearly, in order to make this type of decision, the person serving as trustee will need a good understanding of the beneficiary’s personal needs and basic sound investment rules. (Chapter 5 helps you create a written statement communicating these needs to the person you name as your successor trustee.)
How Assets Get to the Trust
The person who creates a special needs trust often makes the initial transfer of assets into the trust—usually, just a small amount of money. Then, commonly, a parent, a grandparent, or another relative leaves property to the trust by:
leaving it through a will or revocable living trust directly to the trustee of the special needs trust, or
naming the trustee of the special needs trust as a beneficiary on a designation form that controls what happens to a deposit or brokerage account, retirement plan, or stocks and bonds.
More about this in Chapter 4.
How Trust Assets Can Be Used
Trust assets can be used for almost anything that is not illegal or contrary to the terms in the trust. Because the primary purpose of a special needs trust is to enhance the quality of life of the beneficiary with a disability, the list of things that can be paid for is quite broad. Generally, trust funds can be used to pay for:
caregiving (such as a personal attendant or therapies not paid for by Medicaid)
experiences (such as travel or concerts)
services (such as cell phone, Internet, or cleaning service)
pet care (such as pet food or veterinarian care), or
things (such as a computer, clothing, or new furniture).
However, the trustee of a third-party special needs trust must perform a balancing act between making distributions that do not violate the rules of SSI and Medicaid and providing sufficient goods and services to person with special needs.
This balancing act is particularly tricky when the trustee wishes to make payments for the beneficiary’s food or shelter, because such payments often trigger a reduction in SSI benefits. However, even though it’s tricky, it often still makes sense for a trustee to use trust funds for food and shelter because there are exemptions and rules that make the trade-off worthwhile.
EXAMPLE: Eva, a 34-year-old woman with cystic fibrosis, lives in a studio apartment in a “low-rent” part of San Francisco, where she still must pay $800 a month. Eva’s SSI grant—her sole source of income—is $700 a month. Obviously, Eva needs some help with her rent. Under SSI rules explained in Chapter 3, the trust can pay the entire $800 rent, and Eva will lose only about $256 from her grant.
Whether or not to use trust property for food and shelter is entirely up to the person serving as trustee. In the example above, Eva couldn’t force the trustee of her special needs trust to pay the rent money. If the beneficiary did have that kind of power over the trustee, all the funds in the trust would be considered available resources for SSI and Medicaid eligibility purposes. So, although a special needs trust may give the trustee authority to make rent payments, the trust or state law may prohibit such payments if they would interrupt the beneficiary’s eligibility for SSI and Medicaid.
Chapter 3 explains the ins and outs of paying for shelter and associated services, such as utilities. It also provides a long list of items that are typically considered supplementary to the SSI and Medicaid programs and, therefore, appropriate for special needs trust expenditures without any reduction of benefits.
The Trustee’s Role
It’s almost a cliché that the operative word in the phrase special needs trust is “trust.” The person you choose to succeed you as trustee will manage and spend, without court supervision, the property you leave for the beneficiary. You will need to pick one or more successor trustees to step in should you die or become incapacitated. Even if you pick someone else as the initial trustee, you should name successor trustees so that there is someone in line to take over management of the trust if the initial trustee can no longer serve.
When picking trustees and successor trustees, you want to pick people you have complete faith in. In addition to being responsive and sensitive to the beneficiary’s personal needs, the person serving as trustee has the absolutely crucial job of investing and spending trust assets.
You also need someone who will keep up on the law. Generally, trustees are supposed to use trust funds only for goods and services that supplement—but don’t disqualify the beneficiary for—benefits provided by SSI and Medicaid. For this, the trustee needs a good working knowledge of how to spend trust money without affecting eligibility. This can be easy when the goods and services are obviously supplemental but more problematic where food or housing costs are involved. The person serving as trustee will learn about the rules from the SSI program administrators and their regulations, or from a qualified professional resource. (Chapter 10 has more on resources.)
In addition to dealing with the SSI and Medicaid programs, the person serving as trustee has a legal duty to invest the trust assets prudently. Trustees must obey state laws about trust management and must also obey the terms of the trust document itself.
Trustees may be required to spend judiciously to make the trust’s funds last as long as possible. This can be one of the hardest aspects of a trustee role, especially when the beneficiary’s desires conflict with a trustee’s duty to conserve trust funds.
EXAMPLE: Adrian, a 28-year-old with quadriplegia, rents a cheap apartment in a downscale Cleveland neighborhood. He receives SSI and Medicaid and is the beneficiary of a special needs trust containing roughly $200,000 left by his father. Adrian wants to live in a better neighborhood and asks the person serving as trustee of the special needs trust to buy him a house that’s for sale. If the trustee buys the house, almost all of the trust property will be used up. Should the trustee comply with Adrian’s wishes, or refuse so the trust funds will last longer? Because Adrian has no authority to direct the trustee’s disbursements, he’ll have to abide by the trustee’s choice.
So how should Adrian’s trustee go about making this decision? He or she will have to consider the purposes of the trust. One purpose is to supplement the SSI and Medicaid benefits Adrian receives—food, shelter, and basic medical services. Another purpose of the trust is to enhance the quality of life for Adrian. The trustee should also consider the costs of maintaining the home after purchase. Ultimately, the trustee will have to weigh these factors and make a decision. This situation highlights the importance of naming a trustee that you can count on to make difficult decisions.
Unlike Adrian, some beneficiaries cannot coherently express their wishes because of their particular disability—for example, severe autism can have this effect. In such cases, trustees must rely on their own knowledge of the beneficiary’s needs and desires, or on information provided in the trust document or by the beneficiary’s family in a written needs statement (explained in Chapter 5).
Trustees are also responsible for accounting for the trust income and disbursements and filing annual tax returns for the trust. Unless the trustees have tax and accounting expertise, this might be something that should be handled by an outside expert and paid for with trust funds. Of course, if the trustee only writes a few checks a month out of the same checkbook, the accounting will mostly done on the check stubs.
The special needs trust in this book provides that the trustee can be paid a reasonable amount from trust assets for doing trust-related work. Also, because a trustee’s role can be demanding, you may want to name cotrustees to share the load. If the property in the trust has or will have a sufficient value—roughly $250,000 or more—you might also consider turning over the financial management of the assets to a private professional fiduciary or corporate trustee.
The trust will be managed under fiduciary law, which requires the person serving as trustee to do what a prudent person would do under similar circumstances. If necessary, however, the trust document authorizes the person serving as trustee to get expert help—and to pay a reasonable amount for it with trust funds.
Chapter 5 helps you get a grasp on these and other trustee issues so you’ll know what’s in store for trustees and successor trustees you name to manage the trust. A sample letter to trustees, which outlines the information your trustees will need to competently manage the trust, is available in Appendix B and as a downloadable eForm.
In almost all states, you can join an existing special needs trust that is managed for people with special needs by a nonprofit organization. This option, called a pooled trust, may be just the ticket if either of the following applies:
• You need a place to park your loved one’s current assets without jeopardizing their eligibility for SSI and Medicaid.
• You can’t come up with a good candidate to serve as trustee or successor trustee.
Chapter 7 discusses pooled trusts in detail.
Terminating the Special Needs Trust
The special needs trust ends when it’s no longer needed. There are four reasons to end a special needs trust:
Trust funds are depleted.
The beneficiary no longer needs government benefits.
The beneficiary is no longer eligible for government benefits.
The beneficiary dies.
The first reason to terminate a trust is simply because the funds run out. This may happen if the trust wasn’t funded with many assets to begin with, or if the beneficiary lives much longer than originally anticipated. The person serving as trustee doesn’t have to spend the last dime; when funds dwindle to a low level, it may no longer make sense to keep the trust going, given the cost of expenses such as record keeping and expert advice.
EXAMPLE: Eden, age 60, is the beneficiary of a special needs trust that went into effect when she was 20. Eden has outlived her original life expectancy by 20 years. The trust was originally funded with the proceeds of a $200,000 life insurance policy, but over the next 40 years the funds were slowly depleted. Now, only $3,000 is left in the trust, and the trustee can no longer justify keeping the trust in effect, given the expenses of administration.
The second reason to terminate a trust is if it appears that the beneficiary either doesn’t need or doesn’t qualify for SSI or Medicaid. This may happen because eligibility rules change or because the beneficiary’s condition improves.
EXAMPLE: Robert, who suffers from chronic schizophrenia, is the beneficiary of a special needs trust established when he was 28. Now Robert is 55 and, thanks to a new class of antipsychotic drugs, no longer has symptoms of his illness as long as he takes his pills. Because Robert is now able and willing to work, he no longer needs to rely on SSI and his medical care will be picked up by a work-related medical insurance program.
The third reason to terminate the trust would be because a change in program rules made the beneficiary ineligible for SSI, Medicaid, or similar programs if the trust continues in effect.
EXAMPLE: Clara is the beneficiary of a special needs trust created when she was 21. At that time, the laws allowed a person who was addicted to drugs to be considered disabled. Fifteen years later, the SSI rules have changed so that drug addicts are no longer considered to be disabled. In this case, the trustee may have rights to terminate the trust because it can no longer be used for its primary purpose.
In any of these three situations, after all taxes and debts legally owed by the trust have been paid, the trust document provided by this book directs the person serving as trustee to distribute as much of the property to the beneficiary as possible without interfering with his or her eligibility for benefits. If the beneficiary has a legal guardian or conservator, or a person who has been designated to receive benefits on his or her behalf (representative payee), the trustee distributes the property to that person.
EXAMPLE: The person serving as trustee of Emma’s special needs trust decides to terminate the trust because federal law changes will make Emma ineligible for Medicaid benefits if the trust stays in existence, and Emma really needs the benefits. There’s about $10,000 in the trust.
The trustee distributes $1,999 to Emma, which keeps her under the $2,000 resource limit (she doesn’t have any other nonexempt assets) so she can continue to receive SSI and Medicaid. The trustee gives the rest of the money to Emma’s sister, who is named as the remainder beneficiary in the trust document.
If the beneficiary won’t lose any needed benefits as a result, the trustee gives all of the trust funds to the beneficiary or may buy an exempt asset like new furniture or a car.
EXAMPLE: Eli no longer needs government benefits, so the trustee of his special needs trusts ends the trust and gives all of the funds directly to Eli.
The last reason to terminate the trust is when the beneficiary dies. In this case, the person serving as trustee is directed to distribute any remaining trust funds to the person you named in the special needs trust to inherit them. This person is called the “remainder beneficiary” of the trust. (Chapter 5 discusses remainder beneficiaries.)
Checklist: Making a Special Needs Trust
Decide whether or not you really want to create a special needs trust.
• Will you be leaving enough money to make administering a trust worthwhile after you die?
• Are you willing to serve as trustee during your lifetime, or do you know someone who is?
• Is someone willing and able to serve as successor trustee?
• Will your loved one need SSI and Medicaid after your death?
• Would a pooled trust serve your needs better? (See Chapter 7.)
Choose an initial trustee (typically yourself) and one or more successor trustees.
Educate the people you want to name as successor trustees.
• Prepare and give the successor trustees the Trustee’s Duties Letter
(Appendix B) and the Beneficiary Information Letter (Appendix C).
Draft the special needs trust document.
Decide how much cash to deposit in the trust bank account you’ll
set up after you create the trust.
Decide how much property you wish to add to the trust during
Decide how much property you wish to leave to the trust when