Recently, Colin Farrell spoke to People Magazine about his son James and concerns for when he and James’ mother are no longer around to care for his son’s special needs. It’s common for parents of children with disabilities to worry about their kids’ futures, but one way they can provide support and give loved ones peace of mind is by creating a special needs trust.
What is a special needs trust?
A special needs trust, or supplemental needs trust, is a type of trust that holds assets for a disabled individual. Most people with disabilities are only able to qualify for governmental financial support, such as Medicaid or Supplemental Security Income (SSI), if they have limited assets and income (the amount varies by state). So, keeping any other finances separate, such as in a trust, is important to maintain funding from the government.
How is the money in a special needs trust used?
Money in a special needs trust is managed by a trustee and can be used for housing, transportation, education, health and other expenses that supplement government benefits. “You designate a trustee to be responsible for managing those assets, to invest them, to decide how and when they’re distributed,” says Abbey Horwitz, Of Counsel at Coughlin Midlige & Garland LLP. “If [the disabled individual] is qualifying for state benefits, the assets are available for his supplemental needs—so, [money that can be used for] anything in addition [to, if] not otherwise covered by, his state benefits. And by doing that, you have assets available for him if it’s needed. But then, you’re also protecting his state benefits.”
When should the trust be funded?
Horwitz recommends parents to not contribute to a trust until it’s absolutely necessary. “Once [money] gets contributed to the trust, [the trustee is] restricted on how [they] can use those assets,” says Horwitz. “In a typical situation, where we’re counseling parents who are creating a trust for their children, I would suggest keeping the money mostly out of the trust for the flexibility.” Money in the trust has limitations on how it can be used, whereas money outside the trust can be spent at the user’s discretion.
Often, a relative may want to give children money as a gift, but doing so could have unintended consequences. For example, “if you have a grandparent leaving assets to a grandchild, make sure they understand that they have to either designate [the money] to a trust a parent created… or set one up themselves.”
“If there’s money left in [a third-party special needs] trust, when the disabled individual passes away, [the person who set up the trust] gets to decide who would receive it. [The assets] can continue on to our other family members or to our intended beneficiaries,” such as charitable organizations, Horwitz says.
Creating a trust for an adult who becomes disabled
A parent or loved one funding a trust for the future of a child with a disability is called a third-party trust. But a special needs trust can also be created using the disabled individual’s assets—for instance, if an adult has an accident and becomes disabled later in life. This is called a first-party special needs trust. The use of the trust is the same. The money is kept separate so the person with the disability can benefit from government support. However, money in a first-party special needs trust, if not used during the individual’s lifetime, must be paid back to the government through the Medicaid Repayment Program.
Additional important documents
Other important documents an estate attorney can draft is a will, a power of attorney and a healthcare directive. When planning for a loved one with a disability, “the will is more important than the other two documents because the will is the document that says how your assets are being distributed,” says Horwitz. For example, your will can state if your assets will pass directly to your child in their name or into the special needs trust.
A power of attorney and a healthcare directive are essential documents for anyone to create, as these documents can set forth your wishes in the event you become disabled. Both the power of attorney and the healthcare directive end when you pass away and are only used for supportive decision-making—for example, if you get hurt and are unable to make medical or financial decisions for yourself.
Check your beneficiaries
The other thing people should consider, in addition to the will, [is] looking at your beneficiary designation [with] retirement accounts or life insurance [policies]. Because the designated beneficiary at those institutions will surpass anything stipulated in the will.
“Often, we’ll say, ‘I leave it to my spouse, but if they do not survive me, then I leave it to my children equally’,” says Horwitz. “But again, for disabled children, we would want to say it goes into their special needs trust because, if a disabled child receives their share outright, they may lose Medicaid eligibility or be subject to Medicaid repayment.”
While parents of children with disabilities have a variety of concerns, a special needs trust, once in place, can relieve some of that burden from them—especially when they know their child will be financially secure.
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