Fear, dread and loathing
For many parents, the mere words induce brain fog, followed by a strong desire to talk about something else.
A special needs trust (SNT) is a way to ensure the financial future of a child with a disability. It’s one of those things parents know they ought to get done — but which often is pushed to the bottom of the to-do list because of "busyness," confusion, lack of money and a subconscious denial that the parents will ever die.
Although we can’t do anything about the busyness, it’s hoped this article can clear up some of the confusion and answer some of the financial questions surrounding SNTs, and bring parents a little closer to reality regarding the need for financial planning for their children with neuromuscular diseases.
(NOTE: Although most children will be adults when they benefit from an SNT, the term “child” is used in this article because it describes the relationship with the parents.)
Q: We don’t have that much money. Why does my child need a special needs trust?
SSI and Medicaid provide important, expensive resources for people with disabilities, including cash benefits, medical coverage, long-term-care supports, attendant care and other vital services.
Poverty is a requirement for receiving these benefits: If a person has more than $2,000 in assets, then SSI and, possibly, Medicaid are cut off.
SSI cash benefits are meant to purchase the bare necessities of life: food, shelter and clothing. There’s usually not much left over for extras.
When parents are alive, they often pay for these extras: special adaptive equipment, medications and supplements, cell phones, Internet access, vacations, TV sets, dental care, personal hygiene products, art supplies, higher education, movie rentals, etc. Many parents hope to leave their child an inheritance that will continue supplying this higher quality of life after they die.
But therein lies the problem. Even a very small inheritance — i.e., from life insurance or the sale of a house — can terminate SSI benefits if it pushes your child over the $2,000 limit. (Money left directly to the child from any source will have this effect.)
Q: How does an SNT help protect benefits?
A: Rather than leaving money to your child, you can leave it to a trust controlled by someone else — a trustee. When you die, the inheritance assets go into the trust (which may be empty until then).
Your child has no direct access to the money and no control over it. The trustee ensures the money is spent for your child’s welfare — i.e., paying for a trip or cable TV — but never gives any money directly to your son or daughter, so it doesn’t count as an asset in SSI terms.
There’s a catch. An SSI penalty is imposed if funds are used to pay for food or shelter. (Clothing is OK, thanks to a 2005 rule change.)
The government’s reasoning is: If someone has the resources to pay for food and shelter, why should the taxpayers pay for them? Therefore, if the trust pays rent or grocery bills or similar expenses, SSI reduces the monthly benefit check.
However, that leaves a wide variety of things the trust may provide without penalty — such as all those extras mentioned above.
Q: Why can’t I just leave all my money to my child without a disability, and he/she will use it to take care of the sibling with muscular dystrophy?
A: “Disinheriting the child with a disability can actually be a reasonable choice in some circumstances,” says attorney Robert Fleming of Tucson, Ariz., an expert in elder and disability law, and a member of the Special Needs Alliance, a national group of attorneys who specialize in special needs trust cases.
But there are pitfalls. “You’re relying on the good will of the well child to provide care for the child with a disability,” he says. “While you may be completely confident now that will happen, it’s a little harder to predict the future.
“The sad truth is that family members tend to be avaricious. They often become that way for good reasons. Taking care of a sibling with a disability is a lot of work and they begin to feel a sense of entitlement [over the money].”
Another problem, Fleming says, is that the well child may die and the money will pass on to his or her heirs — spouse or children. Will those people be willing to use the money for the benefit of your child with a disability, as you intended?
Q: Do I have to have an attorney to set up an SNT? How much does it cost? At what point do I have to do this?
A: Technically no, you don’t have to have an attorney, just as you don’t have to have an instructor to skydive. But who wants to jump out of a plane clutching a how-to book?
Because each individual’s needs and abilities are different, as are state laws and benefits, and the size of the inheritance varies, there is no one-size-fits-all SNT.
An attorney’s experience in this area is paramount, emphasizes attorney Stephen Dale of Walnut Creek, Calif., an SNT specialist and member of the Special Needs Alliance.
“The most common question people ask an attorney is, ‘How much will it cost?’” Dale says. “The better question is: ‘How many trusts have you actually seen under management?’”
In other words, has the attorney set up an SNT and then seen it used? SNTs usually aren’t used until the parents die, which can be decades after they’re set up. Attorneys may not know how their trusts actually function in the real world: Will they be too limiting, or not protective enough, or run afoul of the Social Security Administration?
Search for the best. In this phone-and-fax age, it’s possible to hire an attorney who doesn’t live nearby. (See “SNT Resources,” below, for ways to locate attorneys who specialize in this area.)
Dale says the cost to set up an SNT usually ranges from about $1,500 to $2,000. “Charging $5,000 or $6,000 is ridiculous, it’s gouging. But a $500 trust is just somebody filling in blanks, and you could do that yourself.”
Some attorneys are willing to take payments, and may give a free initial consultation in which they name the cost, says Fleming. Grandparents sometimes help with costs so they can leave funds to their grandchildren.
Which brings up timing. Obviously, given the uncertain nature of life, sooner is better than later. SNTs can be created up until your child turns 65. Usually this task moves to the top of a to-do list when parents draw up a will or their child turns 18.
Because of the valuable government benefits SNTs protect, they’re more than worth the time and money, says Dale.
“The cost of not doing an SNT is more than you can afford.”
Q: How do I pick a good trustee?
A: This is a critical decision. Trustees are responsible for protecting both the money and your child’s best interests. They completely control the funds, making investment and purchase decisions. If investments go bad, there goes the money. They pay bills, comply with special taxation rules and file paperwork. It’s a complicated job.
A co-trustee team would include a family member and a professional trustee. The family member has close contact with your child and the professional handles the technical end.
Professional or corporate trustees include banks, attorneys and individuals with expertise in this area. They charge a small percentage of the amount in the SNT. Many banks won’t handle SNTs of less than $300,000.
A family member trustee can use trust funds to hire technical help.
Merrill Lynch offers a service called Trust Administrative Advantage, which will do the trust’s accounting, pay the bills, file tax returns and help with questions about allowable expenses, taking most of the tricky financial responsibility off a family trustee. The service handles trusts as small as $25,000, and fees are based on a sliding scale.
“I feel responsibility should be given to family trustees, not corporate trustees, because family members are better informed of the day-to-day needs of the beneficiary,” says Chris Sullivan, vice president of Merrill Lynch’s Multicultural Marketing Group. “But it’s very important to have experts involved so you don’t make mistakes.”
In addition to appointing a trustee, it’s valuable to appoint a “trust protector” who isn’t a trustee but has the power to change trustees.
Q: What’s the downside of an SNT?
A: From the point of view of your adult child, the downside is not having control of his or her own money. It’s annoying — at best — to have to ask a trustee to approve and make purchases.
One way around this is for adult children to get credit cards in their own names, and send the bills to the trust. SNTs are allowed to pay off debt.
Another downside is restrictions. Trustees may not give the individual with a disability cash or pay for food and shelter without triggering an SSI penalty. But in some situations, it might make sense to take the reduced monthly check, because it works out best overall, says Dale.
For example, if the trust paid a landlord $1,500 a month in rent for your child, the maximum SSI penalty (in 2006) would be $221 a month, says Dale. Once the maximum penalty is reached, the trust can then pay for food in that month without incurring any additional penalty. On balance, Dale says, “The SSI reduction may be worthwhile. SNTs should focus on quality of life.”
That’s why he advises clients to set up discretionary SNTs rather than supplemental SNTs. The discretionary trust gives trustees the option (discretion) of making those kinds of delicate decisions, while a supplemental trust restricts payments only to things which “supplement” benefits — not food and shelter.
“A good attorney will try to find the least restrictive alternative, and to have a checks and balances system so that the disabled beneficiary is not subject to the whims or prejudices of a single individual,” says Dale.
Q: If I don’t set up a special needs trust (SNT) for my child before my death, can one be set up afterwards?
A: Yes, but it’s tricky.
If you leave an inheritance directly to your child, then these funds belong to your child — meaning they can make the child ineligible for SSI and potentially for Medicaid benefits. (Remember, funds left to a special needs trust don’t belong to the child, although they are to be used for the child’s benefit.)
When funds belong to the child, a grandparent or the court may set up a self-settled trust in order to protect government benefits. (Self-settled trusts often are set up for individuals who have received a court settlement, such as from a malpractice suit.)
This kind of trust is costlier to establish than a third-party trust, which is the kind set up with funds that don’t belong to the child.
Another downside of self-settled trusts is that when the child dies, any money remaining in the trust must be used to repay the government for benefits he or she received. If there’s anything left after the government has been repaid, it can go to other family members. With third-party trusts, there is no requirement to repay government benefits when the child dies, so all remaining funds can go to family members.
For more information, see "Special Needs Trusts Q and A."
Stephen Dale, attorney
(925) 280-0172 or (415) 989-6900
The Web site offers a wealth of free information on special needs planning and trusts.
This organization has resources for people with many kinds of disabilities, including publications on special needs financial planning and pooled trusts. The Arc has chapters across the country.
Families of Children with Disabilities Program
(Click on Special Needs Financial Services)
This program includes an online special needs calculator to gauge your child’s future income and expenses; referrals to attorneys familiar with disability planning and social service representatives in your area; trustee assistance services and referrals; and special needs financial planners.
MetDESK (Division of Estate Planning for Special Kids)
The division’s network of specialists can help with financial planning and make referrals to knowledgeable local resources. The Web site includes a special needs calculator for estimating future financial needs of children with disabilities, resources and publications.
Special Needs Alliance
SNA offers referrals to disability and public benefits attorneys skilled in planning for children and adults with special needs. The Web site contains special needs trust information and resources.