Estate and financial planners often must account for the fact that certain individuals, due to chronic illness or permanent disability, require support over the long-term (usually in the form of a Special Needs Trust). How this support is provided raises important questions as to estate and financial planning strategies for those who are unable to provide for themselves. These considerations often center on how to provide a sustainable and long-term source of income for a person who is unable to care for themselves.

Primarily, one may ask why is a trust necessary when support could be provided through direct payments such as a stipend or allowance? There are two main reasons, which support the use of a trust. The first reason rests on the idea that a person who is unable to support himself or herself may also not be able to manage his or her financial affairs or may also be vulnerable to exploitation. Under these circumstances, providing support through a trust protects a vulnerable individual from financial risk, whereby their money is managed by a third party who only distributes money to the beneficiary according to the terms of the trust.

The second reason involves the fact that means-tested benefits programs do not allow a beneficiary to exceed a threshold of assets. For example programs such as Supplemental Security Income (SSI), SNAP and the HUD housing assistance program limits the amount of countable assets a beneficiary may have while remaining eligible. For example, SSI has a countable resource limit of $2000 for a qualifying individual and $3000 for an eligible couple. Under these circumstances, a trust allows the beneficiary to have access to financial resources without having them counted against means-tested program resource limits. If the person were being supported through an allowance paid into the individual’s bank account or allowed access to a savings or checking account with funds over the threshold limits under these programs, eligibility would likely be suspended until assets are spent down to the allowable limit. In cases where a disabled person receives an inheritance or settlement from an injury lawsuit problems can arise whereby cash on hand may not be adequate to support paying a caretaker or medical bills over the long term; however the individual will likely not be eligible for means-tested benefits programs such as SSI or Medicaid.

Special Needs Trusts
A Special Needs Trust (SNT), or Supplemental Needs Trust, is like any other trust in that the grantor, typically a person operating under some form of legal guardianship over the beneficiary, funds the trust using their assets or assets owned by the beneficiary. However, under an SNT, the beneficiary has no direct control or access to funds in the trust. Further, the trustee has broad discretion to make distributions to the beneficiary according to trust distribution directives found in the trust agreement. Given that the beneficiary is unable to access the funds without permission provided by the grantor or through the terms of the trust agreement, the assets are not included in the countable asset limit under means-tested benefits programs.

An additional advantage found in SNTs rests in the fact that they can be structured in a manner that allows for support after the beneficiary’s guardian or caretaker passes away, thus allowing the beneficiary to be supported from an inheritance or another large sum of money over time. Just as in other trust arrangements, cash, stocks, bonds, and real estate can be placed into an SNT.

SNTs provide a useful financial planning on behalf of individuals who, in the future or presently, may be unable to manage their financial affairs. However, SNTs’ usefulness to financial planners has been restricted by a wrinkle in the Federal laws authorizing this type of trust. The current law only allows SNTs to be created by the beneficiary’s parent, grandparent or guardian, even if the beneficiary is mentally competent and the trust is being established as a future precaution. The current restrictions prevent a person who is presently able to manage their affairs and is physically disabled or may suffer deterioration in the decision-making capacity in the near future from establishing an SNT on their own. Under the present system, a beneficiary who wishes to fund a first-party SNT must rely on family members for assistance or petition a court to establish the trust.

Proposed legislation before Congress will offer a remedy to this problem area in the present laws governing SNTs. The Special Needs Trust Fairness Act of 2015, which has passed the U.S. Senate and is before the House of Representatives under consideration would amend the current law to allow an individual to create an SNT on their behalf.

For estate and financial planners, SNTs offer a viable option for providing financial support for an individual on means-tested benefits programs or who is unable to manage their own finances. However, as illustrated above for individuals who wish to plan-ahead by setting up an SNT on their own the present state of the law does not allow this, although it is likely to change in the near future.

How Can EstateBee Help You? 

For more information on revocable living trusts, check out some of the other articles on our website and our discussion forum.

Alternatively, if you would like some more in-depth information on living trusts, check out our Living Trust Kit and our book Make Your Own Living Trust and Avoid Probate. Each will guide you step-by-step through the matters you need to consider when making a living trust. You’ll learn all you need to know about living trusts, their advantages and disadvantages, the tax implications, the alternatives to living trusts and, of course, how to easily make your own. With detailed information, easy-to-follow instructions, helpful worksheets and all of the forms necessary, we show both individuals and couples how to avoid the otherwise inevitable delays and costs of probate by preparing a revocable living trust and using other simple probate avoidance strategies.

If you have any questions regarding living trusts, feel free to contact our customer service team who would be happy to answer any questions you may have.