New York Times Article Explores Special Needs Trusts

A recent New York Times article explores the advantages and burdens of a special needs trust.  The article points out that there are two types of special needs trusts; first and third-party trusts.  Both types of trusts are set up to supplement the needs of a disabled party while not jeopardizing their eligibility for government benefits.   Both types of trust need to adhere to some strict legal guidelines.  First and foremost, the beneficiary needs to be disabled, which can usually be determined by either a disability rating from a government agency, or from a physicians opinion letter.   Second, the funds must be used for the benefit of the disabled person only.  Finally, there are some specific rules for first party and third-party funded trusts.

First party funded trust can be set up with the money of the disable person.  However, a feature of the first party funded trust is that any money left over after the beneficiary passes away must be made available first to the government agency which provided benefits to the disabled person in order to pay back part or all of the benefits received.  Third party funded trusts do not carry such a restriction, and any trust funds remaining after the beneficiaries death can be left to other family members.  However, a third-party funded trust typically has restrictions on the beneficiary receiving the property before the trust.  In a third-party trust, it is very important that any wills or insurance funding the trust designate that the money goes directly to the trust and not to the beneficiary personally.

In Wisconsin we also can take advantage of WisPACT, a pooled trust which administers both first and third-party trusts.  As the New York Times article points out, administering the trust and not running afoul of the rules for government assistance is one of the more difficult aspects of a Special Needs Trust.  One of the advantages of a WisPACT trust is that they professionally manage a portfolio of hundreds of special needs trusts.  Another advantage of a WisPACT third-party trust is the broad source of funding which can be used.  Any person other than the beneficiary can fund a WisPACT trust.  Thus, sourcing can come from cash, wills, insurance policies and even novel sources such as funds from a benefit set up for the disabled person.   A WisPACT third-party trust also has the distinct feature which allows the beneficiary to make small gifts to other people while still complying with the Special Needs Trust rules.  For more on the advantages of a WisPACT trust, see this article.   Special Needs Trusts can be a powerful tool for the benefit of a disabled person and should be considered by any family seeking to provide for a disabled child, sibling, or parent.

Planning for a Special Needs Child

CNN Money has an article that is an excellent primer for planning for a special needs child.   The article tells the story of Jason and Amanda Purnell, who have a special needs child, Maya,  with Down’s Syndrome.   With the knowledge that Maya will require lifelong support, the Purnells began planning for her needs by doing the following:

1. Taken out $1.6 million 30 year term life insurance policies
2. Set up a trust with Maya as the beneficiary
3. Drawn up Wills and Powers of Attorney

The article then points out some additional planning that the Purnells should consider.  These include:

1. Setting up a second trust for other family members to contribute to, because the 1st trust is testamentary, that is, it will not become operable until both Purnells die.
2. Ramp up savings and not worry about paying off their low-interest student loans early
3. Plan for their retirement, and Maya’s.

I think this article gives some excellent advice regarding special needs planning.  However, if the Purnells lived in Wisconsin, some of their planning headaches and costs could be minimized by accessing WisPACT.  I have discussed what an excellent resource WisPACT is in the past.  WisPACT could also help the Purnells, because if they were to set up an unfunded 3rd party trust for Maya through WisPACT, they would not need to set up the second trust.   A WisPACT unfunded 3rd party trust allows any 3rd party to contribute to it.  Once set up, any relatives who wish to help fund the special needs trust can contribute money, or name the 3rd party unfunded trust in their Will or as a payee on death in a Life Insurance policy.

It is very important that if a 3rd party unfunded WisPACT trust is set up that any family members know to name the trust when making any bequest.  If the special needs person is named personally, when the distribution is made they are considered to be the owner of the assets, which then count against their government benefits.  That money could be converted to a self funded special needs trust, but it would create a lot of unnecessary problems for the beneficiary.

Tip O’ the Hat to Wills, Trusts & Estates Prof. Blog for bringing this article to our attention.

15 Tips for Preparing a Special Needs Trust and Wisconsin’s Advantage

Wills, Trust & Estates Prof. Blog recently posted an article highlighting 15 tips for attorneys preparing a Special Needs Trust.  In brief, a Special Needs Trust is a trust set up to benefit a disabled person without damaging their eligibility for Medicaid, Social Security or other government benefits.  There are two types of Special Needs Trusts; a self-funded trust with is funded from the beneficiary’s own assets and a third-party funded trust, which is funded by someone other than the beneficiary.  Special Needs Trusts have some restrictions; the beneficiary has to be disabled and cannot have any control over the spending of the funds.  The control over the funds must be in the hands of an independent trustee, with sole discretion over how the funds are spent.  Furthermore, there are restrictions on what the money may be spent on, good or services which are not considered necessary for “special needs” my be counted as personal income for the beneficiary and will temporarily or permanently disqualify them for government benefits.  Self-funded Special Needs Trusts have further restrictions.  First, the beneficiary must be under 65.  Also, there is a requirement that Medicaid be paid back first by any funds remaining in the trust at the beneficiary’s death.

Special Needs Trust funds can be spent on supplemental items needed for the support and maintenance of the disabled person.  Funds can’t be spent on items which are covered as part of the government assistance.  Funds can be spent on a variety of items which are beneficial to the disabled person, for instance a specially equipped vehicle may be purchased to allow the caretaker to transport the beneficiary.  As noted above, the use of the fund are for supplemental needs, and cannot be used to purchase items considered a “luxury.”

Top 15 Tips for Estate Planners When Estate Planning for Special Needs article can be found in Prob. & Prop., March-April 2010, at 39.  In outline the top 15 tips are:

• Don’t disinherit the child with special needs.
• Carefully Consider the division of assets among the children.
• Understand the differences among Medicare, Medicaid, Supplemental Social Security Income (SSI), and Social Security Disability Income (SSDI).
• Choose the trustee of the SNT carefully.
• Parents should prepare a letter of intent to assist the trustee of the SNT.
• Include contingent special needs provisions in clients’ estate planning documents.
• Include special language in a parent’s revocable living trust.
• Include special language in a parent’s general durable power of attorney.
• Parents should review all of their assets and beneficiary designations.
• Consider life insurance as a funding method for the SNT.
• Retirement plan assets may not work well.
• Coordinate other relatives’ estate planning documents with the parents’ third-party SNT.
• Don’t forget the estate plan of the child with a disability and of any unmarried sibling of the child.
• What if the parent requires or may soon need nursing home Medicaid?
• Obtain a court order directing that child support be paid to a self-settled first-party SNT.

The Wisconsin advantage is the availability of WisPACT.  WisPACT is a nonprofit corporation in Wisconsin who’s sole purpose is to manage special needs trusts.  The trusts documents used to set up a WisPACT trust have been created and vetted to make sure they comply with the Special Needs Trust rules.  The trustee’s have experience and will ensure that any distribution request may harm eligibility for government assistance is in the beneficiaries best interest.  The trustee’s experience is beneficial.  Traditional Special Needs Trusts often name a family member of the disabled person as trustee.  These family member trustee’s often don’t fully appreciate the types of distributions which would render the disable person ineligible for government assistance.  This lack of knowledge could lead to serious and expensive mistakes.  WisPACT gives Wisconsin residents in need of  a special trust a powerful tool to use for their Special Needs Trust planning.  For an FAQ regarding WisPACT, click here.