Should Your Child Have a Special Needs Trust?

If you have a child with special needs, you may have been told you should set up a special needs trust.  This article explains the benefits of a special needs trust and how to know whether it’s something that’s appropriate for your child’s circumstances.

What Is the Benefit of a Special Needs Trust?

While there are a number of benefits to setting up a trust for any child, a special needs trust is specifically designed to ensure that assets left to your child as part of your estate don’t disqualify him or her from certain government benefits in the future.

While your child is under the age of 18, his or her eligibility for government benefits, such as SSI (cash payments) or Medicaid, is based on the parents’ income and assets.  As a result, most children with special needs do not qualify for these benefits.

Once your child reaches age 18, however, eligibility for government benefits is based on your child’s income and assets – not yours.  If your child has no assets and is unable to earn an income, then he or she is likely to be eligible for SSI and Medicaid.  If your child is never able to earn a significant income, then he or she may continue to receive these benefits for life.

Those benefits could be disrupted if you pass away and leave assets to your child through your estate.  The inherited assets would be owned by your child and could disqualify him or her from receiving Medicaid and SSI.  Your child’s inheritance could quickly be eaten up in medical bills, leaving him or her no better off than if you had left nothing.  For this reason, many parents in the past would disinherit a child who had a severe disability, leaving all of their assets to other family members in the hopes that those family members would use the assets to care for the disabled child.  Of course, this arrangement was fraught with problems, and many a sibling would simply spend the money on themselves.

A special needs trust is a much better way to ensure that your assets would be used to support your child without rendering him or her ineligible for government benefits in the future.  When assets are left to a special needs trust for your child, the trust assets are not considered to be owned by your child for purposes of Medicaid and SSI.  The trustee that you have named in the trust document may make distributions to support your child without affecting his or her eligibility for Medicaid and SSI.

Are There Drawbacks to a Special Needs Trust?

While there are many benefits to a special needs trust, maintaining such a trust can be administratively burdensome and can severely limit an adult child’s independence and privacy.   It is important to understand these disadvantages and set up a trust that allows the trustee to make adjustments if the disadvantages of the trust outweigh the benefits.  In addition to the trust document, it’s important to put in place a comprehensive plan that clearly communicates your intention for how the trust should be administered.

The primary disadvantage of a special needs trust is that it imposes severe restrictions on the types of distributions that can be made to the beneficiary.  Distributions of cash or the payment of certain expenses can easily disqualify the beneficiary from Medicaid or SSI.  Almost any significant cash distribution from the trust can result in a disqualification.

As a result, distributions from the trust can only be made to the child in the form of direct payments of your child’s expenses; the trustee cannot simply distribute funds to your child to pay ordinary expenses.  Your child would be required to submit a request to the trustee for almost every imaginable expense, from household cleaning supplies to magazines.  This arrangement results in both a significant administrative burden on the trustee and a lack of independence and privacy on the part of the adult child.

In some situations, these drawbacks may be an acceptable cost of preserving government benefits.  In other situations, it may not, particularly where your child is relatively independent and the family has significant resources that can be used to cover healthcare premiums in the absence of Medicaid.  Because health insurance companies cannot deny coverage based on an applicant’s medical condition under the Affordable Care Act, private funding of healthcare coverage may be an option in certain cases.

What Is the Best Solution for Your Family?

Because of the drawbacks of special needs trusts, you should talk with your attorney about what would be in the best interest of your child.  A special needs trust can allow the trustee to decide whether preservation of government benefits is worth both the administrative and emotional costs.  Make it clear in both the document and in communications with the trustee that your main objective is to promote the wellbeing of your child, whether or not that goal means preserving eligibility for Medicaid or SSI.

About the Author

Shannon McNulty

Shannon McNulty is the founder of Savvy-Parents.com and a lawyer in New York City who provides legal planning for parents with young children. Shannon received her J.D. from Georgetown University Law Center and her LL.M. in Taxation from NYU School of Law. She has also earned her CERTIFIED FINANCIAL PLANNER(TM) designation. You can learn more about Shannon and her firm at www.cityparentslaw.com.

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