Creating a comprehensive estate plan should be a priority for every adult. Estate planning takes on heightened importance, however, when one of your beneficiaries is a child with special needs. If you are the parent or grandparent, for example, of a child with special needs extra care must be taken in the creation of your estate plan to ensure that your child with special needs doesn’t lose eligibility for much-needed assistance programs as a result of well-intentioned financial gifts.
Establishing a special needs trust as part of an overall special needs planning component is an option many parents and grandparents in your situation choose. If you are unfamiliar with special needs planning, you may be wondering how it works and what can be purchased with a special needs trust.
The Importance of Special Needs Planning
The parents of any child have a legal obligation to provide for a child’s care and maintenance until the child reaches the age of majority. Many grandparents and other relatives voluntarily contribute to the cost of raising a child as well. Once a child reaches legal adulthood, the obligation to provide support ends; however, many parents continue to provide financial support to their children long after they become adults.
If your child has special needs, providing financial support is likely even more important to you while at the same time, doing so is more complicated. Gifting assets directly to your child, either while you are alive or upon your death, could do more harm than good. Your child will likely depend on the assistance provided by Medicaid, SSI, and other government programs for his/her entire life. Once your child is a legal adult, eligibility for those programs will be determined, in part, on your child’s income and assets – and the asset limit is very low. Your direct gifts, therefore, could cause your child to lose his/her eligibility for assistance.
Special needs planning uses estate planning tools and strategies to get around the asset limit obstacle which allows you (and other family members or loved ones) to continue to provide for your child without jeopardizing eligibility for assistance.
Making the Most of a Special Needs Trust
A special needs trust, also referred to as a “supplemental” needs trust, or “SNT,” is a specialized irrevocable living trust that allows you to continue to provide for your child without jeopardizing his/her eligibility for assistance. Assets held in an SNT are used to “supplemental” the care and maintenance provided by assistance programs. For a trust to be recognized as an SNT by SSI, Medicaid, or other assistance programs, very specific language must be used and the trust must be drafted properly, which is one of the many reasons it is in your best interest to have a special needs planning lawyer assist you.
Once created, you can transfer assets into the trust to be used to supplement the care provided to your child by programs such as SSI and Medicaid. In addition, other family members can contribute to the trust while they are alive or in their own estate plan. Best of all, a special needs trust can continue to provide supplemental financial assistance for your child long after you are gone.
What Can the Funds in a Special Needs Trust Be Used to Purchase?
Once your special needs trust is established, your Trustee must be extremely careful with how the assets held by the trust are used to ensure continued eligibility for Medicaid, SSI, and other assistance programs. Funds in a special needs trust can be used to purchase things that are considered exempt for Medicaid/SSI eligibility purposes or for “supplemental” items not provided by assistance programs, such as a vacation. Examples of exempt assets that are not counted by Medicaid or SSI include:
- A primary residence – there may be an equity limit
- One motor vehicle
- Home furnishings and personal effects.
- Property essential for self-support.
- Assets used toward an occupational goal
- Burial and life insurance policies
Of equal importance are the things you cannot purchase using the funds held in a special needs trust or you risk the loss of benefits on the part of the beneficiary. Examples of things you cannot use a special needs trust for include:
- Cash given directly to the beneficiary for any purpose
- Food or groceries
- Restaurant meals (except if given as an occasional gift)
- Rent or mortgage payments
- Property taxes
- Homeowners or condo association dues
- Homeowners insurance if the insurance is a mortgage requirement
- Utilities such as electricity, gas, and water
- Utility hookup or connection charges
As you can see, the rules regarding the use of funds held in a special needs trust are complex and often confusing. To ensure that you do not inadvertently cause a loss of benefits for your child (or grandchild), be sure to consult with an experienced special needs planning attorney when creating and/or administering a special needs trust.