You may have a special needs child who is developmentally disabled and/or legally incapacitated. As a result of this disability or incapacity, your child may also be on some form of governmental assistance such as Supplemental Security Income or Medicaid.
Many governmental assistance programs have asset and/or income tests. If you make gifts to your special needs child during your lifetime or leave property outright to your child through your will or your revocable living trust after your death, those assets will usually disqualify your child immediately from their governmental benefits. Your child then would have to spend down all of your gift or inheritance to nominal amounts before he or she could reapply for the governmental benefits.
However, when you want to make a gift or leave an inheritance to a special needs child, you can have your cake and eat it too. If you make the gift or leave the inheritance to your special needs child in what is generally called a special needs trust, what you leave to your child will not be counted against him or her for these governmental benefits.
This special needs trust would be drafted in such a manner to pay for things which are not covered by the governmental benefits. Typically the governmental benefits provide for the basic necessities of life such as food, shelter, clothing and/or transportation. The assets in your child’s special needs trust are used for non-necessities or other items that are not covered by the governmental benefits.
The trustee would have sole and absolute discretion to distribute income and/or principal for those extra or special needs of your child. These special needs could include among other things, vacations, a TV, field trips, eating out in a restaurant or going to a play. The trust would fund these additional activities that can enhance the life of your child and make his or her life more meaningful.
For example, in one case, a special needs child loved going to plays. During their lifetimes, Mom and Dad would take their daughter to New York once a year to see a Broadway play. Mom and Dad wanted this tradition to continue after they were no longer able to travel. Mom and Dad set up a special needs trust to provide for their daughter after they were gone. The special needs trust had a provision to direct the trustee to pay for the daughter and a caregiver to travel to New York once a year to go see a Broadway play. After Mom and Dad died, the trip to New York to see a Broadway play still was a major annual event in the daughter’s life.
Similarly in another case in which a special needs child loved going to Detroit Tiger ball games. Dad left a provision in his special needs trust directing the trustee to pay for his son and a caregiver to attend Tiger games, including opening day. This tradition continued long after Dad died.
Special needs trusts can be set up by including the special needs provisions in your revocable living trust. Or you could set up a stand-alone special needs trust that only provides for your special needs child. For economic reasons, you may be tempted to just add the special needs language to your revocable living trust. Don’t give in to the temptation.
Usually, the best protection for your child is the stand-alone special needs trust. This stand-alone special needs trust would have only the minimum provisions required to prevent the trust assets from being available for spend down but still provide for your special needs child. In a typical revocable living trust, there would be many additional provisions, such as providing for you and your spouse during your lifetimes or distributions to other children. Any provisions such as these which are unnecessary to the special needs trust, could be used by the governmental program administrators to disqualify the trust and count the assets as available resources for spend down.
You may find your special needs child in a situation in which your child has already received a gift, inheritance or even a personal injury award that has disqualified your child from governmental benefits. What you may not know is that your child does not have to spend down all of those assets for his or her care and support before he or she can reapply for those governmental benefits.
There are provisions in the federal and state statutes and regulations that are friendly to special needs children. You can set up a special needs trust, usually by court order, and transfer all of your child’s excess assets into that trust. After the assets are transferred to the trust, your child then qualifies and reapplies for the governmental benefits.
This special needs trust which uses your child’s own assets is very similar to the stand-alone special needs trust you would set up to leave an inheritance. However, when you are going to be using your child’s own money to fund a special needs trust, you must include a provision in the trust that reimburses the governmental program benefits upon the death of your child.
With a special needs trust, you can have a happier child and enrich his or her life and make it more enjoyable and fulfilled.
By: Matthew M. Wallace, CPA, JD
Published edited July 3, 2011 in The Times Herald newspaper, Port Huron, Michigan as: Special-needs trust protects child’s assets