Having a child, grandchild, or other potential beneficiary with a disability (often referred to as having “special needs”) makes estate planning more difficult. Proper planning of your will, trust, and beneficiary designations is complicated when you want to protect and provide for an heir with special needs.

With wise advance planning you can provide for all of your family members without jeopardizing a special needs individual’s current (or potential) eligibility for important government benefits such as Supplemental Security Income (“SSI”) and Medicaid. These “needs based” government programs can provide substantial support for your special needs beneficiary but only if you set things up so that the beneficiary will be able to meet the programs’ financial standards.

The rules are complicated and it’s easy to make a mistake. Here are some of common mistakes to avoid when planning for a special needs beneficiary:

(1) Making an inheritance directly payable to the special needs individual from your will, trust, insurance policy, annuity, or retirement plan. The direct receipt of an inheritance will likely make the beneficiary ineligible for continued SSI and Medicaid benefits.

(2) Disinheriting the special needs person entirely and leaving an already vulnerable beneficiary even more dependent upon the uncertain future generosity of the government.

(3) Leaving property to another family member with an “understanding” that they will use the funds to take care of the special needs individual. This plan is fraught with danger and complexity. What if the other family member dies, runs into medical or financial or marital difficulty, or becomes estranged from the special needs person?

(4) Establishing a “support trust” for the special needs beneficiary. The assets in a support trust may have to be spent down before needed public benefits become available.

There are much better ways to plan. The most common estate planning tool is the “Special Needs Trust” which can be created to take effect either during your lifetime or upon your death.

The term “special needs trust” refers to a trust whose funds are deemed to be “unavailable” for purposes of means-tested public benefit programs like SSI and Medicaid. This type of trust is designed to complement rather than replace public benefit supports that are available to the beneficiary.
There are different varieties of special needs trust.

As a parent or grandparent you can set up a “third-party trust” or “discretionary special needs trusts,” which are created by someone other than the public benefit beneficiary. Since these trusts were not created by the individual seeking benefits, many harsh Medicaid program limitations do not apply. This type of trust is frequently a testamentary (created by Will) trust to provide for a disabled child or other beneficiary of the deceased’s estate.

Self-funded special needs trusts (also known as payback trusts) are created under federal Medicaid law. These trusts are created from the funds of the disabled beneficiary and require payback to the state for the Medical Assistance benefits it paid out.

Another option is to use a pooled trust which can be funded by third parties or from the assets of the disabled beneficiary. It is managed by a nonprofit trustee. At the death of the disabled beneficiary, the residue is retained by the pooled trust to use for other disabled persons. Even small inheritance amounts can be accepted by a pooled trust.

A Special Needs Trust can provide for the beneficiary’s continuing eligibility for government benefits, protect the inheritance from claims for government reimbursement, and protect the inheritance from loss to third parties, including siblings, grandparents, aunts, uncles and friends who may have the best of intentions.

Your special needs trust should be carefully drafted by a lawyer who is familiar with this area of law. A wrong word can make all the difference between creating a fund that will enhance the beneficiary’s life by supplementing public benefits, and a fund that will quickly be exhausted replacing those government benefits.

In Pennsylvania, Marshall, Parker and Weber has the experience needed to help your family plan to protect your special needs child or grandchild. Give us a call if you would like to talk about how to best meet your goals.


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