SHOULD MY ESTATE PLAN INCLUDE A SPECIAL NEEDS TRUST?
Does your estate plan contemplate giving property or income to an heir who now, or in the future may, receive government benefits (such as Medicaid or Supplemental Security Income) that could be lost or reduced if the heir receives assets or income directly from your estate? If so, consider distributing the property or income to a special needs trust for the benefit of the heir rather than giving the assets to them outright. If the special needs trust is drafted and administered correctly, the trust assets can supplement and improve the beneficiary’s life without causing the beneficiary’s government benefits to be reduced or lost.
There are two basic types of special needs trusts that are distinguished by the source of funds:
1. A first party special needs trust is funded with the beneficiary’s property. This type of trust must include a provision that pays any assets that remain in the trust at the death of the beneficiary to the state Medicaid agency in reimbursement of benefits provided by the agency to the beneficiary.
2. A third party special needs trust is funded with property that is owned by any person other than the beneficiary.
The discussion below focuses on third party special needs trusts (referred to herein as a “3P SNT”).
A 3P SNT is a trust and, with any trust, there are three parties:
1. the grantor who transfers money into the trust,
2. the trustee who manages the property in the trust and makes distributions for the benefit of, the beneficiary, and
3. the beneficiary who enjoys the benefit of the property in the trust.
A relative or friend of the beneficiary may be the grantor of the 3P SNT; a third party (who is not the beneficiary) may be the trustee, and the person receiving the government benefits is the beneficiary.
A 3P SNT is structured to prevent the beneficiary from losing government benefits by restricting (or prohibiting) distributions for items that are covered by the government benefits (for example, food and shelter) and by making payments on behalf of, rather than directly to, the beneficiary. Unlike with first party special needs trusts, on the death of the beneficiary, the government does not have a right to the remaining trust assets. Instead, the remainder will go to those persons who are designated in the trust agreement.
Things to consider:
1. What should the trust language address? The 3P SNT terms should address, at a minimum, how payments are made (e.g., for the benefit of, rather than directly to, the beneficiary); the intent of the trust (e.g., to supplement rather than supplant government benefits); prohibitions on revocation or amendment of the trust by the beneficiary; whether the Trustee will have a power to amend the trust to respond to changes in laws relating to government benefits; what the trust assets can be used to pay for (and not pay for); and who the property will transfer to on the death of the beneficiary.
2. Who will be the trustee? 3P SNTs are complicated and the rules relating to government benefits are constantly changing. Because mistakes by the trustee may result in a beneficiary losing benefits, and potentially, eligibility for government benefits, it is very important to select a trustee who is knowledgeable in this area of law and who will keep up with the changing regulations. The beneficiary should never be the trustee. It is often inadvisable for a parent or relative to be the trustee due, not only to their probable lack of specialized knowledge in this area, but also because it would place them in a role that may result in a conflict of interest (if they are a remainder beneficiary) and/or give rise to family discord and resentment (when they are put in a position of refusing distribution requests by the beneficiary). An institutional trustee that is experienced in administering these trusts may be the better choice.
3. Do you need an advocate? Often persons receiving government benefits are unable to care for themselves. If the trustee will not keep in regular contact with the beneficiary or is not suited to assessing the actual needs of the beneficiary, then consider appointing an advocate who will represent the beneficiary’s needs to the trustee. An advocate who looks after the needs of the beneficiary may be in a better position to ensure that the trust funds are used to benefit the beneficiary and are not withheld unnecessarily.
4. Who should you hire as an attorney? It is important to hire an attorney who is experienced with special needs trust and government benefits (including veterans benefits, if relevant) to provide advice as to whether such a trust would be beneficial and to draft the 3P SNT language. An attorney experienced in these areas should also be chosen to provide ongoing advice to whomever serves as the trustee.
With an increasing number of people receiving government benefits, it is important that you understand what special needs trusts are and why it may be prudent to include such a trust in your estate plan. By including 3P SNT language in your will or trust, you have a much better chance of ensuring that your bequest improves, rather than disrupts, your heir’s life.
Mathieu, Ranum & Allaire, PLLC is a boutique law firm with offices in Boise and Sun Valley, Idaho focusing exclusively in the areas of estate and trust planning, probate and trust administration, asset protection, business law and charitable organization laws. We represent individuals, families, trustees, heirs and beneficiaries, entrepreneurs and closely held businesses, tax-exempt organizations, and family offices, as well as professionals and business owners potentially exposed to future creditor claims.
The foregoing is NOT legal advice. We have prepared these materials to inform and educate. They are not, and should not be considered, legal opinions or advice to anyone, nor do they create an attorney client relationship by your reading them. These materials may not reflect the most current legal developments in the applicable area of law. Furthermore, this information should in no way be taken as an indication of future results.
© Mathieu, Ranum & Allaire, PLLC. 2015