If you have a disabled child or family member, you have probably heard that you should set up a "special needs trust". Find out what that is and why it is such an important part of any caregiver's estate planning.
In this blog post, I will explain what special needs trust is, and why your disabled loved one may need one. I will provide examples of how a special needs trust can provide for your family member's care when you are no longer able to do so.
Historically, trusts have been seen as a way to avoid paying estate taxes and provide for one's children's livelihoods. In reality, a trust can do many things, including make it easier for your beneficiaries (often your spouse and children) to receive your assets after you pass away, without getting the probate court involved.
A trust can also be useful when you don't want a person receiving a lump-sum inheritance for whatever reason. Maybe that person is not good at budgeting or planning for the future. Sometimes they will be too young to make good decisions. Other times, the person is disabled, and receiving a lump sum could cause significant financial issues, including disqualifying them for certain government benefits they rely on.
A special needs trust is an account created for the benefit of a person with disabilities to supplement whatever government benefits to which he or she may otherwise be entitled. It sets funds aside under the control of a trustee. That trustee can use the money to pay for almost anything the government benefits do not, including vacations, clothing, massages, acupuncture, home furnishings, etc. Because of this, estate planning attorneys will sometimes call a special needs trust a supplemental trust, the idea being to supplement the beneficiary's basic needs.
So why not just give the disabled person the money directly? Why go through all the trouble of setting up a special needs trust instead of just writing the person into your will? It comes down to means-tested government welfare benefits.
Disabled citizens are able to apply for a wide variety of government benefits, including:
However, distribution of many of these benefits depend on people demonstrating they need welfare assistance because they do not have sufficient other means (including income or assets) to provide for themselves. If a disabled person comes into a large amount of money, those assets could cause the person to lose his or her means-tested government benefits, making it significantly harder to make ends meet in the long-run.
To address this, Michigan law allows for the creation of a special needs trust that is held for the disabled person's support, but does not count toward his or her means when government agencies decide whether to award benefits. The important distinction is that these trust funds are distributed to pay for things that benefit the disabled person, rather than being paid to the person directly.
Different rules apply to creating and funding a special needs trust depending on whose money is involved. If the trust is funded with money that belonged to the disabled person himself or herself, it is known as a First Party trust. If it is funded by money from a caregiver, relatives, or other people, it is called a Third Party trust. The rules for these two types of accounts are different.
Sometimes, disabled people come into substantial assets that need to be addressed so they will not lose their benefits. Often this is because:
When that happens, Michigan law has created two forms of First Party Special Needs Trusts: the stand-alone trust and the pooled account trust. Each type has its own strengths, weaknesses and requirements. Which is most appropriate will depend on the individual's circumstances, needs, and goals for the assets. Disabled individuals and their family members should talk to an experienced estate planning attorney to decide which trust is best for them.
However, there is one thing that both types of First Party trusts have in common: much of the money left over when the person dies or the trust is dissolved does not go back to that person's estate. In a stand-alone trust the remnant is used to pay the government back for the benefits received over the person's lifetime. In a pooled trust, the remaining funds are donated to the non-profit that administers the trust. Because of this, many people prefer that the disabled person never receive the assets directly in the first place, so the remainder can be passed on to his or her loved ones.
A third party special needs trust is established using funds belonging to anyone other than the disabled individual. This type of trust avoids the payback requirement to the government and ensures that any remaining funds after the death of the disabled person will transfer to whoever is named in the trust. The assets never technically belong to the disabled person and are administered by a trustee. Payments are generally made directly to service providers, merchants, and other creditors on the disabled person's behalf.
However, most of the time, these third party special needs trusts must be established and funded in advance. Once the disabled person inherits the assets it may be too late to protect his or her government benefits.
This is why caregivers and other concerned relatives need to talk to a knowledgeable and experienced estate planning attorney early. Through proactive planning, including the creation and funding of a special needs trust, you can ensure that your loved one will be cared for without threatening their means-tested government benefits. Contact an estate planning attorney today to discuss your options and choose a special needs trust that works best for your disabled loved one.
Rebecca J. Braun, J.D., is an estate planning and elder law attorney for Mobile Legal Services, PPLC, in Southeast Michigan. She can help with estate planning and trust administration. She will travel to clients, free of charge, in Livingston, Oakland, Washtenaw, Wayne, and Southern Macomb Counties. Contact us for an initial assessment.