Caring for children with special needs comes with a certain set of concerns. So when is a special needs trust necessary?

If a family has a child who has developmental disabilities, how can that child inherit from the parents? How can the parents be assured that their money will be there to help take care of their child? How can the parents feel assured that their child will not be taken advantage of? How can the parents know that the money will not be taken by the state? How can their needs-based government benefits be preserved?

These are just some of the many questions’ parents ask themselves when they have a child who has special needs, whether from birth or developed later in life through accident or illness.

These issues are addressed with a Special Needs Trust (SNT)—an irrevocable trust as the beneficiary for the incapacitated child instead of an inheritance directly given to the child. If the family does not take the time to make a strong and definitive plan, it is most likely the said child’s inheritance will be lost or squandered. 

What Does a Special Needs Trust Do?

A SNT is an irrevocable trust funded from the parent’s or grandparent’s trust at their death. With a SNT irrevocable trust, the person with special needs does not take ownership or control over the assets. A trustee is selected by the parents who uses the trust assets for the beneficiary as needed. By directing the inheritance away from the beneficiary with capacity issues, keeping the assets in trust with a trusted manager, called a trustee, the funds can be used to help offset additional costs not covered under the child’s current benefit plan. This not only maintains the beneficiary’s eligibility in their government benefits, but also protects the beneficiary by using a trusted manager (trustee) who has the beneficiary’s best interests in mind.

Persons with special needs will qualify for one or more governmental benefits. These include—but are not limited to—supplemental disability income, housing assistance, training programs, and state-provided health insurance when they have very limited funds (at the poverty level). If the child is under the age of 18, he or she already qualifies for some of these benefits because they are below the poverty level. Their parent’s assets do not count against them.

The big issue is when the parent or grandparent dies and leaves an inheritance for the child under the belief that he or she will need these assets for their future after the parent/grandparent is gone. Qualification for such government benefits is not just the child’s incapacity, but the inability to pay for these resources. When the child inherits, the government now considers that said child can afford the services as they are no longer at the poverty level. This will lead to being removed from the programs that the child depends on.

This is particularly troubling for those individuals who are on the autism spectrum. Those persons with autism are often best served with a more static regimen. The discontinuing of services can have a debilitating affect by interruption of their routine. This result has been demonstrated over the past couple of years after many programs were unable to continue due to the pandemic. Not only were staffing and safety issues at play, but parents also feared jeopardizing their child’s health. Many individuals suffered significant setbacks by this interruption. An inheritance is most likely to have the same effect, with the added burden of not having the parents here to deal with the situation.

However, if the assets were delivered to a Special Needs Trust, where the child beneficiary has no control over the assets, no power to amend or revoke the trust, those assets are not counted as the child’s assets and therefore do not disqualify the child from the current government benefits they are receiving or may come due to them. Use of the Special Need Trust will help keep the services and routine in place that the child depends upon, without interruption.

Trustee Matters

Too many families will make the mistake of choosing a trusted family member to give their assets to. They have the belief that this trusted person will take care of the child with special needs. This can be a particularly bad idea. To begin with, there is nothing that forces the designated beneficiary to use the funds for the child and not themselves.

Even assuming that the designated beneficiary is honest and has the best interests of the individual in mind, they, too, could die or become incapacitated, leaving the assets to their spouse/heirs who may not have the same goals or allegiances. Other areas of concern are that the designated beneficiary could be sued for divorce. This could jeopardize the assets. The designated beneficiary could be sued for a variety of matters, and the assets would be part of the defendant’s estate. There could even be probate proceeding issues. All these issues can be addressed with a Special Needs Trust.

Case-In-Point

Not long ago, a case came to our office. There were two sisters who were roughly 5 years apart in age. The younger sister was born with developmental disabilities and had significant limitations. When their father passed away, their mother had continued to care for her adult incapacitated child. The mother transferred all of her assets to her ­typically-abled daughter prior to her death. The mom believed that her older daughter would be around to take care of the younger one. When the mother died, the older sister rightfully filed for Conservatorship of the Person for her younger sister and was granted such conservatorship. But then the older sister died pre­maturely—without an estate plan—leaving an estate of a little more than one million dollars.

The sister with special needs became heir of her sister and the inheritance has to pass through a traditional probate proceeding. There were resulting in fees, costs, and statutory commissions in excess of $50,000. At the same time a Successor Conservator of the Person had to be appointed by the court. But since the inheritance passed directly to the sister with special needs, a Conservator of the Estate had to be added with additional costs in excess of $10,000. 

When the young sister passes away, a second probate proceeding will now be required since she cannot execute the appropriate estate planning documents. This will result in another loss likely to exceed $50,000. 

Further still, it is a requirement to provide notice to the state Department of Health Services (DHS), wherein DHS will make a significant claim for reimbursement of benefits. As part of the agreement to accept such government services, the parent/conservator for the incapacitated person pledges that if the beneficiary’s financial status changes, those assets would be used to reimburse the governmental agencies who previously provided the services. 

If the mother had simply used a revocable living trust designating a Special Needs Trust for her daughter’s benefit, there would likely be a savings in excess of $100,000 and no place for DHS to submit a claim. There would be no probate proceeding and unused monies would be preserved for other family members and not the state.

Not Leaving Things To Chance…Or To Probate 

The Special Needs Trust can deal with all of these issues by taking the money out of the hands of the child who has special needs. It places the assets and/or money with a trustee who can be held accountable. Since the assets are held in trust, the trustee owes a fiduciary duty to the incapacitated beneficiary. Other family members may make reasonable inquiries on behalf of the beneficiary to ensure that the money is being held and used correctly for the sole benefit of said beneficiary. The Special Needs Trust will include back-up choices for trustees, ensuring the parent’s choice of trusted individuals and not left to chance by a probate court.

Keep Extended Family in the Loop

Extended family must be in the loop. When we work with a family facing these types of issues, it is important to consider what else can be costly mistakes by extended family. For example, grandparents may leave their assets to their daughter who has three children. One is a child with special needs. If the daughter fails to survive her parents, her share would then be divided by her three children in equal share. The grandparents trust most likely was written before the child with special needs was born. Or the grandparents may not recognize the difficulties and believe that the grandchild will “need the money.” Therefore, any share that was designated for their daughter will now pass in some measure to the child. This starts all of the problems discussed above. Proper communication with the extended family advising those members to either avoid the distributions altogether, or send the assets to a Special Needs Trust. This planning is important on a multi-generational level.

Proper planning can save years of grief working through the court system. It can save hundreds of thousands of dollars for the beneficiary and their family. Speak with your estate planning professional to discuss the personal circumstances of your family. Develop a plan that meet the ultimate goal of providing the best future for the child with special needs.