Here’s How to Protect Your Child’s Future with a Special Needs Trust.

By attorney L. Mark Russell

As parents, we all know job number one is to keep our children safe. But when you have a child with a disability it gets confusing as to how to do that.

Some things you can’t control like perhaps some of your child’s medical problems. But, fortunately, you can do things today that will protect your child’s future. And it all starts with a special needs trust.

Here’s why your child needs a special needs trust: Imagine you’re a parent with two children – one with special needs. You never got around to getting a will or a special needs trust for your child.

Now you die.

What happens?

The state you live in “writes” a will for you. Every state has what’s called an “intestate” law, meaning (from Latin) “to die without a will.”

This law (in most states) gives your estate at your death in equal shares to your children. (Or, if your spouse survives you, most intestate laws split your estate between your surviving spouse and your children.)

What’s so bad about your child with a disability receiving a share of your estate on your death?

4 Reasons Why You Should Almost Never Leave an Inheritance Directly To Your Child with a Disability:

Reason #1: Assets your child inherits will very likely disqualify your child from receiving Supplemental Security Income (SSI), Medicaid and other government benefit programs that require an unmarried person with a disability own no more than often a mere $2,000.

Reason #2: The state will seize your child’s inheritance for medical or residential cost-of-care claims. After all, almost anything your child owns the state can seize for reimbursement.

That’s their job.

Your job is to protect the inheritance you leave your child with a disability, because your child will likely live twenty or many more years after your death and the money you leave for is…

...your child’s last safety net.

Reason #3: If your child has an intellectual disability, your child will be unable to manage the money, making it last for your child’s lifetime.

Reason #4: If your child is naïve or gullible, your child may be taken advantage of and swindled out of the money.

So, what should you do to safeguard your child’s financial well-being?

The Foolish Way (And the Smart Way) To Leave Your Money to Your Child with a Disability After You Die.

The foolish way: Give your estate after your death to another family member with the unwritten “understanding” that he or she will care for your child.

Question: If you do that, does your relative have to spend the money on your child?

Nope!

Although your relative should feel a moral obligation to spend the money on your child, legally your relative could buy a vacation condo in Florida instead.

But….you might say…my relative loves my child with a disability and would never do anything like that.

Maybe so…but just think about what else could go wrong.

What if your relative dies before your child? What if your relative gets sick, moves into a nursing home, and bills gobble up the money?

What if your relative crashes a car…and is sued?

The fact is just about anything can happen to the money you leave a relative. There’s no guarantee it will end up being used solely for your child with a disability, regardless of how much your relative loves your child.

So, what’s the answer?

The SMART way to leave an inheritance to your child: Have a special needs trust “catch” the inheritance for your child.

What the Heck Is a Special Needs Trust?

First, we need to define what a trust is.

A trust splits “legal ownership” from the “beneficial interest.” In other words, the trustee manages the assets in the trust for the benefit of the beneficiary (your child with a disability). The trustee invests the money, monitors your child’s needs, and pays for products and services your child needs out of a trust checking account.

Tip: Selecting your child’s trustee is one of the most important decisions you make when setting up your estate plan.

Let’s say, for example, you choose your brother to be the trustee of your child’s special needs trust after your death. Your brother, as trustee, legally owns and manages the money, subject to the terms of the trust.

And the trust says your child with a disability is the beneficiary. That simply means your child receives the benefits of the money in the trust.

So, if your child needs to go to the dentist, the trustee can pay the dentist out of money in the trust.

See how the trust splits “legal ownership” from the “beneficial interest?”

That’s the core concept of a trust.

But now let’s get back to defining a “special needs” trust or what others sometimes also call a “supplemental needs trust” or a “discretionary special needs trust.”

Now, this is going to sound kinda strange, but I like to think of the special needs trust as though it’s a kind of gift certificate.

What you’re saying in the trust is essentially… “Trustee, the money I leave to this trust at my death is a gift for my child with a disability. I can’t leave the money outright to my child with a disability. So, trustee, I want you to manage this money for the benefit of my child with a disability. Here’s how I want you to spend this gift for my child...”

And just like a gift certificate, the actual words in the trust are critical. For your child to remain eligible for government benefits and to stop the state from seizing the money in the trust for residential or medical cost-of-care claims, you have to have the right language.

Okay, so far so good, but here’s where it gets a little tricky.

Let’s say you leave your child’s inheritance to a trustee to manage for the benefit of your child with a disability.

Question: Does your child with a disability, the beneficiary of the trust, own the money in the trust?

If your answer is “yes,” then your child will not qualify for government benefits such as Supplemental Security Income, because an unmarried person cannot own more than $2,000 of “countable resources” to qualify for SSI.

Well, what do you think?

At first blush, you might say “No.” After all, I just told you it’s the trustee who legally “owns’ the property. The beneficiary only has what geeky lawyers call a “beneficial interest.”

But any ol’ trust is not good enough.

Warning: Don’t Let Your Attorney Make This Big Mistake When Drafting a Trust for Your Child.

There’s a dark history of attorneys drafting trust for people with disabilities just like they draft trusts for people without disabilities. That is, they’re clueless about the importance of maintaining eligibility for government benefits and protecting the money in the trust from state cost-of-care claims.

For example, whenever you see words like “health, support, and maintenance” in a trust for person with a disability, you should hear sirens blaring…Danger ahead! Your child’s safe future may be at risk.

Here’s why:

It’s common for attorneys to say in trusts…use the money in the trust for the “support, health, and maintenance” of the beneficiary. And that works just fine if the beneficiary does not need government benefits.

But if those words are in a trust for a person with a disability, there’s a good chance the trust will be liable to the state for residential and health cost-of-care claims.

Remember: Whatever your child “owns” may be vulnerable to your child’s creditors, including the state for cost-of-care claims.

So, the key question always is…

Does the beneficiary of the trust “own” the money in the trust?

At first glance, the state shouldn’t be allowed to seize the money in the trust: The beneficiary has only a “beneficial interest.” There’s nothing for the state to attach to. The trustee “owns” the money in the trust, NOT the beneficiary.

But the states argued if you use language like “health, support and maintenance,” that gives the beneficiary something akin to ownership.

Why?

Because the beneficiary might be able to go to court and compel the trustee to use the money for his or her “health, support and maintenance” even if the beneficiary doesn’t have the power to compel the exact timing or size of the distribution.

And depending on the actual language in the trust, the states won these cases about half the time, giving them the court’s seal of approval to snatch the money in the trust to pay for cost-of-care claims.

So, in general, don’t put words like “health, support, and maintenance” in a special needs trust. Instead, here in Illinois, I like to use a totally discretionary standard such as “deems advisable.” That is, the trustee can use the principal and income of the trust for whatever the trustee “deems advisable” for the beneficiary And then I state that the intent of the creator of the trust is to “supplement and not supplant” government benefits.

How Special Needs Trusts Got Their Name…

In the 1980s as states were breaking into support trusts to repay themselves for cost-of-care claims, a handful of attorneys across the country believed they might have an ace in the hole: Centuries of trust law upheld the intent of the person who creates the trust.

We experimented with trust language that explicated stated the parent’s intent when setting up the trust. We put right in the trust document the intent of the parent creating the trust was to use the money in the trust to “supplement and not supplant” government benefits.” After all, only a Kennedy or a Rockefeller had enough money to pay for their child’s care privately for their child’s lifetime.

And, of course, we avoided like the plague using words like “support, health, and maintenance.” In fact, we made it clear in the trust that the beneficiary could not revoke the trust nor compel the trustee to make a distribution.

The states still challenged these trusts in court. But for the most part, the courts following the direction of centuries of common law that honored the intent of the creator of the trust stopped the state from seizing the assets in the trust for cost-of-care claims.

Ta da.

A huge victory for the future well-being of people with disabilities. Plus, I might add, a darn great thing for the states. Now, the state and the special needs trust shares the financial responsibility of caring for the person with a disability. A true public/private partnership.

So, that’s how “special needs” or “supplemental needs” trusts got their name – from the intent language in the trust.

But, you’re still not quite out of the woods yet.

The Special Needs Trust Must Also Comply With Income and Resource Restrictions of Other Government Benefit Programs, particularly Supplemental Security Income (SSI)

The key to a special needs trust is keeping the individual with a disability eligible for SSI, because eligibility for SSI often opens the door to other vital government benefits such as Medicaid.

To determine eligibility for SSI, the important question is whether the money in the special needs trust counts as a “resource” of the beneficiary. If the answer is yes, then the beneficiary will be considered to own more than $2,000 (assuming the trust has more than $2,000 in assets) and be ineligible for SSI. (Note: The resource limit is $3,000 for a married person.)

To answer this question we have to turn to the SSI regulations defining “Resource:”

Resources means cash or other liquid assets or any real or personal property that an individual owns and could convert to cash to be used for his or her support and maintenance. If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual.

What does this tell us about how we have to draft special needs trusts?

Quite simply, your child with a disability cannot have any control over the special needs trust. Your child cannot

be the trustee. •
have the power to revoke the trust. •
have any power to control the amount or frequency of distributions from the trust. •
have the power to sell anything in the trust.

Congratulations!

By investing some of your precious “free time” in learning about special needs trusts, you’ve taken a big step toward protecting your child’s future.

Feel free to sign up below for my electronic newsletter. I will periodically send you information that you can use right away to give your child the best possible future.

Best regards,

L. Mark Russell Attorney

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