I find that one of the toughest parts of the estate planning process for many parents is deciding how they will leave their property to their children after their deaths. Estate planning brings up many parenting issues -- our dreams for our children's futures, our concerns about giving a child too much too soon, our desire to help our children overcome obstacles without creating a disincentive to be productive.
After sorting through these issues, parents end up structuring their estate plans in ways that make sense for their own families. In some plans, parents direct that their assets will be used only as a safety net. In others, parents direct the trustee to use trust assets to maintain their children in the same lifestyle the parents enjoyed. Some parents decide property should pass outright to their children shortly after the children reach adulthood. Some decide to keep property in trust until their children reach their 30s or 40s. Others decide to keep property in trust for their children's entire lifetimes with the remaining assets eventually passing to grandchildren.
When a parent has a child with disabilities, the parent faces the additional challenge of figuring out how to provide support and care for the child for the child's lifetime. The child may be unable to earn an income. The child may require the assistance of caretakers. On-going medical costs may be high. It is often critical to preserve the child's eligibility for SSI and Medi-Cal as part of the plan, whether the child currently receives benefits or may apply for benefits in the future.
The approaches to estate planning that make sense in many family situations may not make sense if a parent is planning for a child with disabilities. This is because there are strict restrictions on the assets and income of SSI and Medi-Cal recipients. Parents and other family members may unknowingly jeopardize the SSI and Medi-Cal eligibility of a child by leaving property outright to the child or naming the child as the beneficiary of a support trust. A properly drafted special needs trust preserves eligibility, because the trust assets are not counted as the resources of the SSI or Medi-Cal recipient. The special needs trust allows the child to benefit from private sources -- such as life insurance proceeds and gifts from parents and other family members -- while preserving the child's eligibility for needs-based public benefits.
Special needs trusts fall into two categories -- third-party and first-party SNTs. Third-party SNTs are funded by someone other than the beneficiary. First-party SNTs are funded with the beneficiary's own assets. This post focuses on the third-party special needs trust. There are important requirements not mentioned here that must be followed to establish a first-party special needs trust.
Some key concepts about third-party special needs trusts:
- The trust can be established as a stand-alone trust during the parent's lifetime or can be established on the parent's death under the terms of the parent's own revocable living trust.
- The beneficiary of the special needs trust cannot be the trustee of the trust, cannot control the distributions from the trust, and cannot revoke the trust and use the trust assets for his or her benefit.
- The trust assets must supplement and not supplant government benefits.
- Depending on the situation, the trust may be drafted to allow distributions that result in the reduction of public benefits in order to allow flexibility.
- The concept of "special needs" is broad. If the beneficiary receives SSI and Medi-Cal, then the trustee can use trust assets for basically anything other than food, "shelter," and Medi-Cal provided medical services.
- There are different ways to fund the third-party SNT. Parents may want to seek the advice of an investment advisor or life insurance professional with expertise in planning for individuals with disabilities.
A special needs trust does not always make sense, but in many cases it is an important part of the overall plan for a child with disabilities to lead a happy, productive and dignified life.
The information provided in this website/blog is for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice.