February 27, 2015

Do I need to create a Special Needs Trust for my child with a disability?

What is a Special Needs Trust?

A Special Needs Trust (also called a Supplemental Needs Trust) for a disabled child is a trust formed by the parent and funded with assets that normally would placed into a regular account for the child, and which "shields" those assets from being considered assets of the child for governmental benefit purposes.

Many times, parents (very responsibly) fund UTMA (Uniform Transfer to Minors Act) or other accounts for their kids. Those funds are considered to be owned by the kids as a result of gifts from the parents to the kids. When the kids are minors, they cannot take legal ownership of the funds – that only happens when they reach the age of majority (either 18 or 21, depending on the actual account set up). Once a child reaches that age, he or she can legally do anything they want with the money. (Yes, sometimes, children don’t really know that the accounts can be accessed by them, and they allow their parents to direct as to how the funds should be spent - such as when the child is in college, and the child “pays” college tuition or other expenses with the funds.)

In some cases, when a child turns 18, (s)he may be eligible for SSI (Social Security Income) and other benefits such as Medicare/Medicaid as a result of a disability. However, for many programs he or she will NOT be considered fully eligible until all of his or her other assets are exhausted. (The government does not pay social security income or Medicare/Medicaid if a recipient has other available funds, and requires the potential recipient to “spend down” those funds before becoming eligible to receive benefits.)

While many parents are very responsible and do their best to provide for their kids, government benefits can be very helpful to a family – even a family with adequate resources – especially where there are other children, retirement and college accounts to fund, etc. So, many families plan in advance to both (1) provide for their child, and (2) arrange the child’s finances so that the then-adult child (age 18) will be eligible to receive government benefits in addition to funds set aside by the parents (or others) as gifts to the child during the child’s younger years.

What a parent may want to do now is set up a Special Needs Trust (also called a Supplemental Needs Trust) (Parent SNT) that will be funded with future gifts from the parents and others (up to the maximum amount per year that is exempt from gift tax – now $13,000 per person per recipient - $26,000 per year from both parents and $13,000 per year from any other person). That trust would also be in existence throughout the life of the child to accept any death benefits payable should either parent or even a grandparent pass away. If set up properly, the funds in the Parent SNT do NOT disqualify the child for government benefits (because the trust, not the child, “owns” the funds and the funds are distributed by a trustee in accordance with the terms of the trust). The trustee (you or any successor) can use the funds in the trust to pay for any supplemental needs not covered by government benefits -- the funds cannot be used to pay for ordinary daily needs that would be covered by governmental benefits. Thus, the child gets the benefit of government help AND other supplemental needs met (such as recreation, education, etc.) from the funds set aside for the child’s benefit.

What if We Already Have UTMA Accounts in the Child's Name?

Here is the kicker. A parent cannot fund a Parent SNT with funds that are already considered to be the child’s (UTMA account in existence), and thereby convert those funds that are already in the name of the child to funds that are not considered the child’s for government benefit purposes. So, even if you set up a Parent SNT now, at age 21 when the UTMA funds legally vest in the child’s name, the UTMA funds may have to be used to  pay back government benefits (s)he had been receiving from the age of 18 and/or the existence of the UTMA accounts will disqualify her for benefits (even if (s)he was previously qualified) if the account still has a balance . So, while a child may have become eligible for and been receiving benefits from the age of 18, once the UTMA funds vest (s)he will become ineligible until those funds are spent to payback benefits already received. After the spend down, (s)he will then be eligible again for government benefits.

Again, when the child turns 18 years old, (s)he may become eligible for certain government benefits, and the UTMA funds vest in him/her when (s)he turns 21.  What some people do is use the UTMA funds already set aside for the benefit of the child with the intent that by the time (s)he turns 21 (s)he has no assets that (s)he owns and legally controls. During the period before the child turns 21, the funds in a UTMA account can be used to pay for supplemental expenses for the child –pay for school, pay for an apartment, pay for camp or a car, etc. If those funds are exhausted before (s)he turns 21, then she will not lose her benefits eligibility as a result of having available funds in her name when (s)he turns 21.

In the meantime, you can set up a Parent/Third Party SNT and fund that with future gifts to the child. That trust would be mentioned in the parents' wills as the trust that would receive any testamentary bequests from either or both parents, and would maintain eligibility for government benefits for a child who may be eligible.

For more information, consult: www.specialneedsalliance.org;
http://www.socialsecurity.gov/ssi/spotlights/spot-trusts.htm; and a lawyer experienced in handling special needs trusts in your State.