Special needs trusts – Part 1: What they are, & motivation to create one
Special needs trusts: you’ve probably seen the phrase. Maybe you have a vague idea that they involve the inheritance for disabled adult children, and an even fuzzier idea that you should set one up. But dang – they sound complicated, boring, and expensive. Anyway, who has the time or energy to think about the distant future when we’re overwhelmed in the here and now?
Yes, it’s easy to procrastinate, or to talk yourself out of creating a special needs trust. No government agency is going to penalize you for failing to set one up. Nor will a big brute with a heavy object clobber you if you don’t create one.
It took my husband and me five years of saying, “Yeah, we should do that” before we finally set up a special needs trust (SNT). And guess what? The process wasn’t as complex as we’d thought it would be, and the expense was reasonable for what was done. (Boring? Well …).
My goal in writing about special needs trusts is to motivate you to set one up also. You’ll then have the satisfaction of knowing you’ve made the future life of your disabled adult child the best you possibly could.
I’ll try to make the discussion about special needs trusts as clear and non-boring as I can. As part of that commitment, I’ll spread the discussion out over several posts, so your eyes won’t cross from reading one massive discourse about SNTs.
To start, we’ll look at the basics of a special needs trust, followed by my attempts to poke holes in reasons for avoiding setting one up.
SNTs in a Nutshell
Special needs trusts are in the same category as wills, living trusts, estate plans, etc. – they come into play after you, and your spouse (if applicable), have passed away. We don’t like to think about our death, but it’s guaranteed to happen (unless you’re immortal, in which case you’re excused from reading any further).
The idea of special needs trusts came about due to the “wealth” limitations for being covered by SSI and Medicaid: a disabled individual is disqualified from receiving benefits as soon as s/he has assets in excess of $2,000. If the individual’s assets exceed $2,000 after inheriting money directly from parents or other well-meaning relatives, poof! – there go the benefits.
So while you’re still alive and incredibly with it, you create a special needs trust for your disabled son or daughter. As part of doing so, you name a trustee: someone who will monitor and distribute the trust funds to cover your child’s expenses other than food and shelter (which are supposed to be paid for with SSI money). You also create an account that sits in the trust, ready to hold inheritances or other contributions. Because your child will have no control over the money in the trust, the money is not counted as part of his/her assets, so the government benefits are not jeopardized. Ta-daa!
Your special needs trust:
- ensures that your disabled son or daughter can have an inheritance of whatever size available to sustain his/her quality of life, while also continuing to be covered by SSI and Medicaid.
- designates someone you trust to spend funds for the good of your son or daughter, based on your documented wishes.
- avoids probate costs.
- documents the final arrangements you want for when your daughter or son passes away.
- specifies how the funds in the special needs trust will be distributed after your child has passed away.
- can be updated as circumstances change.
Future posts will go into more detail on many of these points. But, if you can’t wait to learn more, other sources have information on SNTs. This link from NOLO is titled “Special Needs Trusts – The Basics.” CNBC has a clear discussion. And here is another discussion from the Special Needs Answers website. Books (remember them?) also have been written about SNTs. And if you attend a conference related to disabilities, check the vendors’ exhibits: chances are an attorney or a special needs financial planner will be among them.
Reasons to avoid creating a special needs trust, and counterarguments
1. Good health. You aren’t planning to die anytime soon: you are healthy, with lots of years between now and Your Deathbed Scene.
I am glad to hear you are healthy. Truly, that is good news. Now I hate to point this out, but Life has a way of throwing curveballs. For instance, all it takes is one car accident – one driver not paying attention – and your son or daughter could be facing life with you gone or incapacitated, like, tomorrow.
2. It costs too much. Money doesn’t grow on trees!
Doing nothing now costs you nothing (now) – this is true. I read somewhere that more than half of families with children with disabilities haven’t prepared a will, let alone a special needs trust. Without a will in place, the inheritance is distributed among your heirs as determined by the legal system. If that means the disabled child ends up with more than $2,000, SSI and Medicaid go away.
Wills by themselves are less expensive to create than trusts. You can download create-your-own-will forms for free, or hire an attorney, who might charge $200 – $600 for the task. However, wills won’t bypass the problem of losing government benefits. Also, probate costs significantly diminish the size of the inheritance. The next generation sure could use that money….
Living trusts and special needs trusts avoid these pitfalls, and have other benefits. But they do cost more for attorneys to prepare. Legal Zoom says attorney fees for creating a trust may range from $1000 -$1500 for an individual and $1200 – $2500 for couples.
Sticker shock? It is possible to prepare a special needs trust on your own, as this link from NOLO points out. I like how it discusses the pros and cons of do-it-yourself vs. hiring an attorney, depending on your circumstances. To prepare your own, you’d need time, persistence, a clear head, and attention to detail, among other attributes. Doing it incorrectly could have big consequences.
Although we did-it-ourselves for a couple of legal procedures in the past, for our special needs trust we opted to hire an attorney. His fees were $2,000. In addition to an SNT, our attorney and his paralegal prepared: updated wills for each of us, a family trust, healthcare powers of attorney, medical directives, and a few other documents. They also supplied instructions for the trustee of the special needs trust, which will be very useful when the time comes. All of this and more, plus their expertise – we felt we got our money’s worth.
And think of it this way: $2,000 translates into maybe 3-4 months of SSI at today’s payout rates. Isn’t it worth spending that much now to preserve years of your child’s SSI payments in the future? And for the individual to have medical coverage?
3. Depend on a sibling. You can leave your child’s share of your inheritance to another son or daughter, who can be trusted to follow your wishes in using that money for the sibling.
This scenario could turn out fine. However, as the CNBC discussion points out, the trustworthy son or daughter at some point may face a lawsuit, bankruptcy, divorce, or unexpected financial troubles – and that set-aside for their sibling could shrink a lot. A trust protects those assets from claims, creditors, and temptation.
4. Your son or daughter isn’t currently covered by SSI or Medicaid. Why set up a special needs trust to protect benefits s/he isn’t getting now?
The key word in that argument is “now.” Do you have confidence that your adult child will earn money consistently enough to be self-supporting for years and years? If they are chronically unemployed or employed part-time, will they have health insurance? After you set up the SNT, it’ll be there if and when your child needs it.
5. The new ABLE accounts will make special needs trusts obsolete. Right?
Not exactly. Here’s an earlier post about ABLE accounts. These accounts allow some disabled individuals who receive government benefits to have assets up to $100,000. However, there is a $14,000 annual limit on contributions to an ABLE account. And that $100,000 overall limit may be a problem for sizable inheritances.
Anyone with more arguments or expertise: feel free to comment!
Meanwhile, here’s the Big Idea: despite some hassle and expense, creating a special needs trust is worth it, to extend your love and care for your special needs child beyond the time your loving, caring heart has thumped for the last time.
UPDATE: I found this lively article on SNT procrastination, written by an attorney, after publishing this post. You’ll see some of the same arguments and counterarguments, plus more!
[Source of the graphic: Slideshare.net – Katherine Zacharias]