ESTATE PLANNING FOR FAMILIES WITH DISABLED INDIVIDUALS

When a family includes a disabled child or grandchild, there are special considerations that should be made in the estate plan for the disabled child. The primary concern of parents is to assure an adequate standard of living and quality of life for a disabled child or grandchild. There are two types of trusts that can be used which can assist families in achieving that goal. The first is a Supplemental Needs Trust, and the second is a Special Needs Trust.

  1. Supplemental Needs Trusts.

    1. What are Supplemental Needs Trusts?

      2. The goal of Supplemental Needs Trusts is to provide a fund which can be used to greatly enhance the disabled beneficiary’s standard of living or quality of life. The source of funds are assets which have never legally come into the beneficiary’s possession or ownership. Supplemental Needs Trusts are funds from third parties, such as parents or grandparents.

      This type of trust is legal under both Federal and State law.

      Funds typically come from:

      • parents and grandparents
      • a lifetime gift into trust or a gift into trust upon death (through a will or a revocable trust) of the parent or grandparent.

      These trusts can be funded with any type of asset including life insurance, bank accounts, investment accounts, real estate, stocks, bonds, or other securities.

    2. How can These Funds in Trust be Used?

      3. This trust is a “non-support” trust, limiting the Trustee’s distribution to “non-support” or “nonessential” items. The goal is not to displace any public benefits that the beneficiary may receive. Some examples include:

      • medical, dental or diagnostic work that is not covered by other private or public funds;
      • supplemental nursing care and rehab services not covered by benefits;
      • special therapeutic items or durable medical goods which are not covered by benefit programs;
      • differentials in cost between housing and shelter for shared and private rooms in institutionalized settings;
      • expenditures for travel, companionship, cultural experiences;
      • computers, specialized computer software, internet access;
      • care giver salaries which are not covered by benefit programs;
      • educational items, programs, or vocational training;
      • recreational or educational camps, vacations, hobbies;
      • vehicles which can include handicapped accessible autos, fuel and maintenance;
      • funeral expenses;
      • holiday gifts from the disabled person to friends/family; and
      • supplemental needs trusts have been used to cover such items as cellular phone coverage for care givers or family members, cable television expenses, and other household related expenses that are necessary to provide quality of life items for a disabled beneficiary.

      The Special Needs Trust funds cannot pay for the necessities of life such as food, utilities, clothing or shelter. The trustee must be very careful with the trust fund expenditures to ensure that none of the very complicated eligibility rules of the various programs which benefit the disabled person are compromised.

    3. How to Establish a Supplemental Needs Trust.

      4. A Supplemental Needs Trust can be established in one of two ways:

      • “Inter Vivos Supplemental Needs Trust.” This trust is a stand alone Supplemental Needs Trust document which parents or grandparents would establish during their lifetime. Quite often, families will establish an Inter Vivos Supplemental Needs Trust during their lifetime, and perhaps designate a life insurance policy to pay into that trust by simply changing a beneficiary to the name of the trustee. The funds are thus set aside for the disabled child.
      • Supplemental Needs Trust can be part of a Will or a Revocable Living Trust, and actually works as a “subtrust,” where funds for the disabled beneficiary are channeled into the trust rather than passing to the beneficiary outright.
  2. Special Needs Trust
    1. What are Special Needs Trusts?

      2. Special Needs Trusts are designed to preserve a disabled beneficiary’s public benefits, protect funds that have come into the beneficiary’s name, and provide a trust fund which can be used to greatly enhance the beneficiary’s standard of living or quality of life.

      This type of trust is legal under both Federal and State law.

      This particular type of trust differs from the Supplemental Needs Trust described above in that it covers assets which have already passed into the beneficiary’s name, whereas the Supplemental Needs Trust dollars never actually get to the beneficiary because they are retained in the trust.

    2. What are the Legal Requirements?

      3. Like the Supplemental Needs Trusts, Special Needs Trusts must be carefully drafted, however the requirements are even more strict under the Federal rules and regulations. In general, these are the basic requirements:

      • The beneficiary must be under age 65;
      • The beneficiary must be “disabled” as defined by the Social Security Act;
      • The Trust needs to be established with assets of the disabled individual (where the title of the assets has already come in to the disabled individual’s name);
      • The Trust is established by either the parent, grandparent, or guardian of the disabled individual, or the Court; and
      • The Trust must be a Medicaid “Pay Back” trust.
    3. What Assets Would be Placed in a Special Needs Trust?

      4. These trusts are funded with a disabled beneficiary’s own funds. Funds come from:

      • inheritances or gifts (life insurance proceeds, cash, real estate)
      • settlement proceeds (personal injury or medical malpractice lawsuits)
    4. How can These Funds in Trust be Used?

      5. These funds are used substantially the same as the funds are in the Supplemental Needs Trust described above, however there are more restrictions. For example, on the death of the beneficiary, funds may NOT be used for funeral or last expenses.

      The primary disadvantage to these trusts is that the law requires a “pay back provision” and this absolutely must be included in the trust or the trust will not qualify as an exempt asset for the beneficiary.

    5. What About the Pay Back Provisions?

      6. In order for this trust to qualify under federal law such that the disabled person does not lose benefits, this trust must be a “payback” trust, meaning that there must be a provision in the document allowing the State to be reimbursed for all amounts paid out by the State of Minnesota.

For More Information Contact:
Lisa Bowen, Attorney
Thornton, Reif, Dolan, Bowen & Klecker, P.A.
1017 Broadway, P.O. Box 819
Alexandria, MN 56308-0819
320-762-2361

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