If you are a special needs parent, you are likely already thinking about how to best protect your special needs child throughout life. Fortunately, it is not difficult to put estate planning protections in place which can give your special needs child, and the rest of your family, a more secure financial future.
Special Needs Trusts (SNTs) are designed to hold assets to benefit a special needs child or adult, without disrupting government benefits (such as Medicaid or SSI) which the child may either receive now, or may need later. But one SNT is not just like another SNT — in my legal practice, I draft 5 different types of SNTs designed to comply with different federal and state laws. Each type of SNT has different strengths and weaknesses, and may be appropriate for some situations but not others.
A TESTAMENTARY SNT, OR A 3RD PARTY SNT, KEEPS THE PARENT’S ASSETS WITHIN THE FAMILY
A parent who is a better advance planner can choose between the two SNT types which provide the most flexibility to parent and child, and help insure that the parent”s hard-earned assets stay within the family.
When I do estate planning for families with minor children (including where the children do not have known special needs), I typically recommend to parent(s) that we add a “testamentary” family trust benefitting the children to to a parent’s will or trust documents. If the parent(s) passes away, the parent’s chosen caretaker (trustee) then steps in to manage the money the parent left behind in “trust” for the children, following the instructions in the parent’s will (or revocable trust) that the parent left for the financial caretaker.
If the parent has passed away after previously purchasing life insurance benefitting the family trust, the life insurance payout is added to the trust, which can help insure that enough funds are left behind to take care of the children’s education and other needs, into adulthood (and beyond if needed.) These testamentary family trust funds are asset protected, which means that any future creditors cannot get to assets left for the children, making these trusts much safer than leaving benefits behind “in cash.”
“Testamentary” means that the trust starts at the parent’s death. When one or more of the children have special needs, I can set up specific “testamentary SNT” language within the parent’s will or revocable trust document, which means that any trust money that later flows to the special needs child complies with federal and state laws, so that the money can be used to pay for the special needs child’s “supplemental needs” (expenses that Medicaid, SSI, or other government programs do not pay for.)
Even if the government program’s rules provide that the child’s assets must remain under a strict “asset cap” ($2,000 or less for example), the testamentary SNT makes the $10,000, $75,000, $500,000 (or more) that the parent leaves for the special needs child “noncountable.” In other words, the SNT assets are counted by the government as “zero dollars,” and do not count against government benefit program asset limits.
Funds which flow into a child’s asset protected testamentary SNT remain noncountable no matter how old the child is when the parent passes away. And, when the special needs child passes away himself or herself in time, any funds left behind in the child’s SNT may be directed to other family members, such as the SNT child’s own children, or the special needs child’s brothers and sisters, so that the parent’s funds remain in the family.
A parent or other relative who wants to start setting aside funds for a special needs child during the giver’s lifetime (which can start benefitting that child right away) may set up a 3rd party SNT. The 3rd party SNT can make the parent’s or other relatives assets donated to the SNT asset protected immediately. These SNT funds will also remain asset protected even if the special needs child later has legal or financial problems. A 3rd party SNT may protect assets for a special needs beneficiary of any age. The 3rd party SNT does not have a mandatory government payback provision, so that if the SNT beneficiary passes away unexpectedly, any funds remaining in the special needs child’s SNT may then be used to benefit other family members. And, I can set up the parent or donating relative’s estate documents so that any additional funds left for the special needs child at the giver’s death will be directed into that child’s existing 3rd party SNT.
IF A PARENT DOES NOT PLAN, THE “SELF SETTLED” OR “D4A” SNT PROVIDES MORE LIMITED BENEFITS
As a special needs attorney, it is not uncommon for me to receive an urgent call from a special needs person, or their advocate, letting me know that the special needs person has inherited, or is about to inherit, a parent or relative’s assets, but is now at risk of being kicked off Medicaid or SSI for having too many assets. In these cases, the parent or relative may have wanted to benefit the special needs person, but did not plan well, thus I now have to make up for lost opportunities. If the special needs individual, or their advocate, is not aware that emergency options exist for making inherited assets noncountable, an unfortunate special needs person may lose access to needed government benefits, or needlessly private pay down the inheritance to become asset qualified again for government benefits programs.
In North Carolina, an “NC ABLE” account may now be used to make inherited assets noncountable, as long as the inherited assets (along with any other assets placed into the ABLE account within a year’s time) do not rise above the NC ABLE program’s $15,000 annual contribution limit.
If the inheritance is larger than $15,000, using an NC ABLE account (to make inherited assets noncountable against a government benefits program’s asset cap) may no longer be a good option. The “self settled” d4A SNT (named for the federal rules which authorize it), may be available in these cases, but the d4A SNT provides more limited benefits than a testamentary SNT or 3rd party SNT would have provided.
Unlike the testamentary or 3rd party SNTs discussed above, under North Carolina trust law, the “self settled” (meaning a person sets up a trust with the person’s own money that later benefits that same person) d4A SNT is not asset protected. Thus, for example, if the d4A special needs beneficiary is a licensed automobile driver but has a car accident causing harm to others that is not fully insured, their SNT assets may potentially be tapped to help pay an accident award to an opposing attorney and their clients.
The d4A SNT is also age-limited–it cannot make a special needs beneficiary’s assets noncountable once the special needs beneficiary reaches age 65.
Federal and state law also requires the d4A to be drafted with a government payback provision. This means that if a special needs beneficiary passes away, any funds left in their SNT must first be used to pay back the government for the money the government expended on the special needs beneficiary, before any other family members or other “successor beneficiaries” may use these funds. Realistically, the government’s care bill may insure that no remaining funds reach other potentially needy family members.
THE D4C POOLED SNT IS NOT AGE LIMITED, BUT IT ALSO CONTAINS A MANDATORY POOLED TRUST FUND PAYBACK PROVISION AND GOVERNMENT PAYBACK PROVISION
If a special needs beneficiary who inherits funds is age 65 or older, as the attorney, I may be able to make those funds noncountable against a government benefits program’s asset cap (as long as the beneficiary was disabled before reaching age 65) by using a “d4C” pooled SNT.
The pooled d4C SNT “pools” the funds benefitting a special needs beneficiary with the funds benefitting other special needs beneficiaries (but separate accounting is provided for each individual beneficiary.) In North Carolina, mandatory payback provisions must be included within these trusts which provide that if a special needs beneficiary passes away, up to 50% of their remaining SNT assets may be directed back to benefit other pooled fund special needs beneficiaries, with the state agency that benefitted the deceased special needs individual potentially receiving funds as well to reimburse for that individual’s state-supplied care.
Parents (and other relatives of special needs persons) who plan in advance do not leave their special needs child’s future to chance. Parents who plan may choose from testamentary or 3rd party SNT options that help insure that the funds that they leave for their special needs child will remain asset protected regardless of that child’s age, and will remain in the family to benefit other loved ones (instead of being directed back to the government or others) if their special needs child unexpectedly passes away.