If you are caring for a disabled loved one and do not have a special needs trust in place, you are not alone. According to a 2011 survey conducted by the MetLife Center for Special Needs Planning, nearly four in every five caregivers have not established a special needs trust.
Unfortunately, failing to set up this type of trust — or making mistakes in its execution — could leave your loved one or family member financially vulnerable after your death. A special needs trust (sometimes called a supplemental needs trust) can ensure that your loved one maintains their quality of life without risking their eligibility for certain public benefits like Medicare and Medicaid.
Below, we discuss how to avoid these common mistakes while planning for your loved ones. At Montagna Law, our experienced Virginia special needs trust attorneys can guide you through the legal intricacies of these unique trusts to prepare for the best possible care for your loved one.
There are several rules surrounding the creation and administration of special needs trusts, and making a drafting mistake — even a seemingly minor one — could invalidate the entire trust. Virginia Code Title 64.2, Subtitle III, Chapter 7 sets out the legal requirements that trusts must meet to be enforceable.
In our experience, the worst repercussion is that the special needs trust ends up being drafted in a manner that makes the beneficiary lose their Supplemental Security Income (SSI) benefits and Medicaid benefits. Another terrible repercussion is the use of Crummey Powers or HEMS standard in a special needs trust that would end up defeating the purpose of this trust.
It is crucial to seek legal advice from a law firm with experience drafting and administering special needs trusts, or SNTs. Below, we explain 13 of the most common mistakes we see, why they matter, and how you can avoid them.
Sometimes, parents of a disabled child will leave assets to non-disabled beneficiaries with specific instructions to use these assets to care for their disabled loved one. Unfortunately, these instructions may not be enforceable once the will is probated, and this can result in inadequate care for the disabled beneficiary.
Moreover, if the non-disabled beneficiary has debts sent to collections, gets divorced, or winds up in hot water with the IRS, the assets you intended for your disabled child’s care may wind up with the beneficiary’s creditors instead.
If your will lists your disabled beneficiary as an heir to your estate, any funds that are transferred directly to your loved one could disqualify them from public benefits. Instead, your will must designate a third-party special needs trust as the beneficiary. Once funds are transferred to this trust, the trust executor can use them for your loved one’s care, maintenance, and support.
A special needs trust is designed to supplement public benefits, not replace them. It is essential to consider your beneficiary’s continued quality of life, care plan, living arrangement, and advocacy. This special needs trust can be as detailed as it needs to be to ensure your loved one remains financially secure for the rest of their life.
Although you cannot perform estate planning for a minor beneficiary, you can grant a minor the power of appointment over their trust funds once they reach adulthood so that these assets do not fall into intestacy upon their death.
Each state has laws of intestate succession, outlining how assets must be distributed if someone dies without a valid will. If a special needs trust beneficiary dies intestate without exercising their power of appointment, they may lose control over the distribution of assets in their trust.
Although you may feel compelled to guide the use of the trust assets for your family member’s benefit, one key requirement of a special needs trust is that the trustee has full discretion over the funds. If the trustee lacks this discretion, the funds may be considered available to the beneficiary — which can mean disqualifying them from benefit programs. Removing the trustee’s discretion makes the trust more of a support trust than a special needs trust.
One common restriction in other types of trusts is that the assets may be used only for “HEMS”: the beneficiary’s health, education, maintenance, and support. But while these are worthwhile considerations for special needs trust beneficiaries, stipulating that trust funds are to be used only for the beneficiary’s HEMS needs removes the trustee’s discretion and can put the trust’s special needs status at risk.
Crummey Powers involve designating gift assets in a trust document when you draft it. Ordinarily, this will enable the beneficiary to withdraw that gift without paying any gift tax. However, this gift can jeopardize the special needs trust beneficiary’s public benefits since it is considered “available income.” Like HEMS restrictions, Crummey Powers can also restrict the trustee’s discretion over trust funds.
As you can see, placing any provisions in a special needs trust that restrict the trustee’s power can jeopardize the trust. Restricting this trust from providing for things already covered by public benefits or nonprofit services (like healthcare, housing, or food) can cause more harm than good.
For example, suppose your beneficiary does not qualify for public housing but also cannot find affordable housing using only their SSI income. In that case, the special needs trust can be used to help with this expense.
The special needs trust should be sufficiently funded to maintain the beneficiary’s quality of life. This is especially true when the beneficiary is unlikely to have any income apart from public benefits and distributions from the trust.
Even if you do not have cash on hand, you can fund special needs trusts from various sources, including personal injury settlements, life insurance proceeds, gifts from grandparents, and other assets that might otherwise pass through the probate process. ABLE accounts are another way to fund these trusts; these are tax-advantaged savings accounts for disabled individuals and their loved ones.
Finally, you may consider a pooled trust, which is a nonprofit-managed trust that combines the resources of multiple beneficiaries to reduce administrative costs and optimize benefits. Individuals who take part in a pooled trust have their own sub-accounts and can receive a proportional share of trust earnings.
Some special needs trusts are “first-party” trusts, which are authorized under 42 U.S.C. § 1396p(d)(4)(A) and (C). These trusts are established and funded by the disabled beneficiary themselves, often using personal injury proceeds or other assets. Third-party trusts, on the other hand, are funded by someone other than the beneficiary.
Federal law requires a payback provision only for self-settled or first-party special needs trusts. In fact, including a payback provision in a third-party settled trust could subject the trust drafter to a malpractice lawsuit. The Social Security Administration governs third-party settled trusts, which do not include any payback requirements.
According to the Social Security Administration, to qualify for the special needs trust exception, the special needs trust must be established to benefit a disabled person under age 65. While you can still establish a trust for the benefit of a disabled person age 65 or older, this trust will not be treated or characterized as a special needs trust.
If a self-settled special needs trust is made revocable, these funds are considered available — which means they can disqualify the beneficiary from government benefits. Instead, these trusts must be irrevocable, which means that even the grantor or settlor cannot reallocate funds once the trust has been established.
If a trust beneficiary contributes assets to a third-party settled trust, this trust is transformed into a self-funded trust. When this happens, the trust may be subject to Medicaid reimbursement after the beneficiary’s death.
Although asking a friend or family member to serve as trustee may be tempting, this is not always the best idea. A professional trustee will understand the law surrounding public benefits and special needs trusts and can help see that the trust complies with all state and federal laws.
You should appoint a “trust protector” to monitor the execution of the trustee’s duties. Among their other duties, a trust protector can remove a trustee and appoint a replacement if the trustee is not acting in the beneficiary’s best interest. Trust protectors may also amend the trust and approve specific distributions, helping provide an additional layer of oversight over the trust.
Sometimes, trust settlors may forget to notify their appointed trustee or guardian — or even assess whether this person is available or willing to serve in this role. By informing the trustee or guardian ahead of time, you can ensure that they are not surprised by these responsibilities and have adequate time to educate themselves on their role.
As you can see, the various types of special needs trusts can be complex to create and administer. Any trust-drafting templates you find online are filled with disclaimers, and for good reason — this is not a good DIY project.
The attorneys of Montagna Law have decades of experience in handling the planning and execution of special needs trusts in the Hampton Roads area. We can guide you through the process and resolve complications as they arise. Call our Norfolk office today at 757-622-8100 or use our online contact form to learn how we can help you manage your trust with confidence.
Jon Montagna received a Bachelor of Arts in Literature from American University in Washington D.C. and graduated Cum Laude from the University of Miami School of Law in 1999. Jon practices law in the Hampton Roads Virginia area.