Estate Planning with a Special Needs Child | The Special Needs Trust

As estate planning attorneys, we understand that planning one’s estate typically is not a task you look forward to. Planning also becomes more complicated when you have a child with special needs, depending on the level of care that child needs. Additionally, they might be on a public benefit, like Medicare, Medi-Cal, or even social security, where if they have funds in their name above a certain threshold, they lose that benefit. There are 3 different ways to plan around this yet still leave money to a special needs child, even if they can’t manage their own finances. However, 1 option, a special needs trust, is often better than the others. We’ll briefly discuss these other options before diving into the Special Needs Trust.

Custodian Accounts

Custodian accounts are straightforward. You select someone to serve as the custodian and manage assets for children in a custodial account. This allows the person you named to manage a child’s money and property until that child turns 25, the legal limit, at which time the money becomes the child’s property outright. It is typically a normal bank account or a brokerage account and the funds in it can be used for that child’s benefit prior to them gaining control of the funds. No terms can be set on how that money is used though, and the custodial has to file a tax return on the child’s behalf each year.

Typical Trust Account

Next, we have setting aside funds in a normal revocable living trust. As a part of the distribution of your trust, funds are set aside for the benefit of someone just like a custodial account. However, you aren’t restricted to having the funds distributed no later than age 25. Under the trust, you have a lot more flexibility to design how and when those funds are to go out. For example, not until age 35 or only distributions of the income or a set amount at certain intervals and any money left over goes elsewhere. The trustee is in charge of managing the money and holds the purse strings according to the terms you set. You can even set conditions as to early distributions and the general use of the money, the most common being for HEMS – health, education, maintenance, and support.

Read More: What Goes into a Trust?

The Special Needs Trust

This brings us to the Special Needs Trust, or the SNT. It is a separate trust from your typical revocable living trust where money is sent and the entre purpose of the trust is to work for the benefit of someone else. The Special Needs Trust is an irrevocable trust, meaning once it is established and funded with money, it’s set in stone by design. Having the SNT be irrevocable means no matter what, the trustee of that trust has to use the funds for the benefit of the beneficiary, in this case the special needs child, but the money is explicitly not that beneficiary’s property. They don’t have a right to the money in the normal sense. The trustee runs the show, but it’s not their money either – it’s the trust’s money. If the money outlasts the life of the beneficiary, then the funds go to the next beneficiary outright, which will be someone you pick when creating the SNT in the first place.

The big advantages the SNT has over a custodian or typical revocable living trust account is the control of the funds and right to the funds. Under a custodian account, the money has to go to the beneficiary no later than age 25 and there are no restrictions on what the money can be used for at all. Funds in a trust account are not in the beneficiary’s name, but that beneficiary has a “beneficial right” to the money, and they might receive it at some point in time. However, under the SNT, the beneficiary never has control over the funds, they cannot force the trustee to make payouts the trustee deems unnecessary, and the funds go to a different beneficiary at the end of the day. This means money held in an SNT for the benefit of someone cannot be considered as an asset or income to that beneficiary when it comes to qualifying for public benefits or even creditors. The money is truly separate from the beneficiary in all ways that matter but must be used to help that beneficiary.

Let’s discuss an example. Mom is a widow and has 2 children. Her son has special needs and is on public benefit (like Medicaid or Medi-Cal), while her daughter is neuro-typical. Mom knows son is going to need help after mom passes and he either cannot manage his own money or will lose his public benefit if he gets an inheritance. To plan around this, mom creates a typical revocable living trust (an RLT) and also a Special Needs Trust but puts all of her assets in her RLT. At mom’s passing, daughter steps in as trustee of the RLT, which says that ½ of mom’s estate is to go to the Special Needs Trust (the SNT) that was created for the benefit of her son. Daughter is also the trustee of the SNT, moves ½ of mom’s estate into the SNT, so now it’s funded, and she begins paying for her brother’s bills that aren’t covered by public benefit. Mom does have to explicitly disinherit her son in her RLT, but she is specifically providing for his care through the SNT, all while ensuring he doesn’t lose any public benefits he might have because as far as those programs are concerned, he didn’t receive any inheritance money.

Special Needs Trust Does Not Require Special Needs

On an additional note, Special Needs Trusts may also be used in other situations, not only where a child has special needs in the traditional sense. We have had clients establish a Special Needs Trust for the benefit of a child that has a drug problem or a money problem for example. In that case, some refer to the trust as a supplemental needs trust. Additionally, you can create these types of trusts for the benefit of anyone. They do not have to be a blood or adopted relative of yours.

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