For any parent, the desire to protect and provide for a child is a strong motivating factor within their estate plan. For the parent of a child with special needs, protecting and providing for their child takes on a heightened importance because their child may never be completely independent. Achieving those goals, in turn, requires careful estate planning which often includes the inclusion of a special needs trust. For those who are unfamiliar with a these trusts.
What Is a Special Needs Trust and Why Might I Need One?
A special needs trust, also referred to as a “supplemental” needs trust, is an irrevocable living trust that is specifically designed to protect assets intended for a beneficiary with special needs without jeopardizing the beneficiary’s eligibility for assistance programs.
Typically, parents structure their estate plans so that assets are gifted directly to their children at some point after they become adults. If you are the parent of a child with special needs, however, gifting assets directly to your child will likely do more harm than good. Most children with special needs will depend, to some extent, on state and federal assistance programs (such as Medicaid and SSI) for their entire lives. Eligibility for those programs, however, depends in part on an applicant’s income and assets. Gifting your child assets, therefore, will likely cause him/her to lose eligibility for these crucial assistance programs. The concept of a special needs trust evolved as a way to resolve this dilemma. When properly drafted, a special needs trust allows you to provide financial support to your child (grandchild, family member, etc.) without jeopardizing his/her eligibility for benefits.
Types of Special Needs Trusts
Although they both accomplish the same goal, there are two distinct types of special needs trusts. It is imperative that you understand how both work so you know which type you should establish.
- First-party special needs trust – also referred to as a “self-settled” trust, a first-party special needs trust is established using assets of the person with special needs. The beneficiary of the trust must be someone with special needs or who is disabled. The trust is actually established by a parent, grandparent, guardian of the person with special needs, or by a court; however, it is funded using assets owned by the beneficiary. This type of special needs trust is most frequently needed when someone with special needs (or a disabled individual) receives a lump sum of money. For example, if the individual received a settlement for injuries in a personal injury accident or received an inheritance. With a first-party trust, any assets remaining in the trust upon the death of the beneficiary must be used to pay back Medicaid (assuming the beneficiary was a Medicaid recipient). By contrast, with a third-party special needs trust there is no need to worry about repaying Medicaid.
- Third-party special needs trust – not surprisingly, a third-party special needs trust is established by a third party with assets owned by the third party for the benefit of a person with special needs. This type of trust is most often established by a parent, or other family member, for the benefit of a child with special needs. A third-party special needs trust is funded using assets gifted by the parent, grandparent, or other family members. This type of trust must include specific language and must be worded such that the assets in the trust are actually distributed to a third party, such as the parent, to be used for the benefit of the individual with special needs. Because the assets held in the trust are not available to the beneficiary, those assets do not disqualify the beneficiary from eligibility for assistance programs such as Medicaid and SSI.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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