Special Needs Trust Q & A
Q: Can someone other than a parent open or contribute to a Special Needs Trust for an individual? For example a friend or grandparent?
A: If it is a third party SNT, yes. Anyone over the age of 18 can open and/or contribute to an SNT for the benefit of someone receiving government benefits.
Q: Should the Special Needs Trust be partially funded when setting it up (or a small token amount)? If you are creating an inter vivos SNT (created by a living person for the benefit of another person), it should be partially funded.
A: Typically, it can be the minimum amount required to open a bank account. You can also fund the SNT through a life insurance policy, i.e., name the SNT as the beneficiary of the life insurance policy. Or, you can even use other assets to fund the SNT like business interest, stocks, bonds, real estate, etc.
Q: How frequently should the trust be gone over by a lawyer?
A: Estate plans should be looked at every 5-10 years or upon a significant life event, i.e., divorce, fiduciary appointment passes, certain changes in law, etc.
Q: For the money that goes into a trust for your child, what happens if you child dies with money remaining in the trust? Is it possible to have the unused portion of the trust be inherited by other family members?
A: For a third party SNT, you designate in the Trust Agreement who you want inheriting the money upon the death of the disabled beneficiary. In many cases, the trust terminates upon the death of the disabled beneficiary and the trust estate either gets distributed according to the trust agreement and the designated secondary beneficiaries or it falls into the decedent’s estate. I do not recommend letting the latter happen. For a first party SNT, there is a mandatory Medicaid payback provision.
Q: Should the Special Needs Trust lay out specific things that the trust money will cover or is there a general term that can be used by the executors to ensure that unforeseen needs can be met (for example, a specifically equipped van that wasn’t needed when the trust was set up)?
A: It is best to leave the distributions to the beneficiary fully discretionary (Trustee has complete control); however, I recommend putting examples in the Trust Agreement, i.e., certain specialty van, etc.
Q: What happens if someone leaves money unexpectedly to the child? Can the trust specify that any money left to him/her be routed to the trust so that this unexpected inheritance doesn’t affect services?
A: You CAN in Texas through a Family Settlement Agreement and so long as the Medicaid reporting requirements are followed. As a more general statement, if someone leaves money outright to a person receiving government benefits, there are ways to fix it, but you will want to contact an attorney ASAP because it varies by state law and particular Medicaid program. I strongly recommend setting up a third party SNT now so that you don’t run into any problems like this where you may have to create a first party SNT, which is funded by the child’s own inheritance money because then it is subject to the Medicaid payback requirement. At least if there IS a third party SNT already set up, it is a better argument to have grandma’s bequest paid out to the SNT instead of the disabled person outright.
Q: Does the trust need to have an executor? What if the executor passes away?
A: It needs to have a Trustee and you should have 2-3 alternatives/back-ups in case the first designation passes away. Or, you can use a Pooled Trust where a nonprofit serves as Trustee or a Corporate Trustee if no family members or friends are willing to act as Trustee or alternates Trustees.
Q: When should the trust be set up? How long does the process take?
A: I would set it up now either through your Will or as a stand-alone. It depends on the attorney’s availability, but it shouldn’t take more than 2 meetings.
Q: Do all trusts work in one state once created? Or, if the person moves to a different state, does a new trust need to be made/current trust updated?
A: It is wise to get an attorney in your state to at least review it if you move. For example, there may be different reporting requirements. The variance in the laws is more about the administration of the trust and to be sure there are the required provisions in the Trust Agreement based on state law.
Q: Could we just review what the funds in a special needs trust can be used for?
A: I know there are lot of limitations but I don’t know the details. Good rule of thumb is do not use trust funds on anything that Medicaid or SSI pays for.
Q: From an estate planning perspective, what is the maximum amount of money you would recommend leaving to a special needs trust? We have two other typical children and we don’t want to over-capitalize a special needs trust when we pass, especially given we have two other children.
A: I think a great thing to do is have a life insurance policy for your typical children and one for your special needs child. There is no maximum amount, but I would base it on the child’s needs now and once they are an adult.
Q: This dovetails with the question above, could we review what happens to left over funds in the trust when our special needs child passes? In what instances are they clawed back by the state vs distributed to the trustees?
A: Yes. Instances where there is a “clawback” for Medicaid is a first party SNT or an ABLE Account.
Q: Is an adult disabled 19 year old (who I have legal guardianship of) living with me and paying rent to me with his SSI money considered a dependent of mine still? Asking for tax as well as legal purposes.
A: It should be.
Q: What are the major differences between a special needs trust and an ABLE account? (e.g. Are there different rules about how the money can be used? And in most (all?) states, the money left in an ABLE account after a person dies is confiscated by the state as reimbursement for the money expended by Medicaid over the course of the person’s life. Is the same true of a special needs trust?
A: If you establish a third party SNT now or through your Will, then there is no requirement for state reimbursement, and you can leave the funds to whoever you want upon the death of the disabled person receiving benefits. The major difference between a third party SNT and an ABLE account is that with a third party SNT, the creator of the trust is someone other than the beneficiary and its funded by people other than the beneficiary. The ABLE account and first party SNT are used as accounts to protect money that is given to a disabled person outright and needs to be held in a separate account so that they do not lose their benefits; however, they both are subject to state reimbursement upon the death of the disabled person.
Q: Are the rules of the Special Needs Trust different from state to state?
A: Unfortunately, yes so it is wise to get an attorney in your state to at least review it if you move. For example, there may be different reporting requirements. The variance in the laws are more about the administration of the trust and to be sure there are the required provisions in the Trust Agreement based on state law.
Q: Do you have to have a Will to create a special needs trust?
A: No.