How to Use Special Needs Trusts, James Gets an Inheritance, part 4

For this installment on Special Needs Trusts allow me to introduce James. James grew up with very loving grandparents. They wanted to make sure that James would have all the support he needed to pursue hobbies and have an occasional outing with friends and family. When his grandparents passed away James was left with a $300,000 inheritance. Unfortunately, as the money was left directly to James, his government benefits were immediately put at risk.

James’s parents worry that James will not have enough to support himself without access to government benefits. They consult with a lawyer to discuss the matter. As a result, James’s parents set up a first person special needs trust on behalf of James.

The first person trust allows James to put the inheritance into the trust and to continue to qualify for government benefits. The only catch is that at the end of James’s life any funds remaining in the trust are used to payback medicaid expenses over his lifetime. For this reason you will sometimes hear this type of trust referred to as a payback trust.

From the time James receives the inheritance until the time that he funds the trust he will not be eligible for needs-based government benefits. The entire inheritance will be considered an asset for James. Therefore James will be over the $2,000 threshold for assets. If James is a minor and not yet receiving needs-based benefits then there should be no impact. However, if James is already receiving benefits then it becomes a matter of urgency to establish the trust and move the funds into it.

A better alternative would have been for a special needs trust to have been set up by James’s grandparents. In this way, James’s access to benefits would never have been jeopardized. Additionally, by setting up a special needs trust, the grandparents could have specified how any remaining funds would be used once James passed. And, as noted in prior posts, a third party special needs trust set up by James’s grandparents would not be subject to a payback provision to the state medicaid fund.

In either case, the trust created with the inheritance gives James a good step forward in providing for a better quality of life. However, even a trust that starts with $300,000 may not be enough to cover all that his parents would want for James.

Ideally, James’s parents will also save toward providing James with a better quality of life. James’s parents can establish a special needs trust for the benefit of James. The goal of this trust would be to supplement James’s basic needs and what is provided for by the inheritance.

Let’s assume that James’s parents are able to create and fund a third party special needs trust. In that case, the question becomes in what order should funds be used. Since the trust created from the inheritance has a payback provision it makes most sense to spend those funds first. That way, in case there are funds remaining at the end of James’s life, the remaining funds can continue to be used for the family’s needs.

In our next installment, I will conclude the series by discussing trustees and the administration of trusts.

How to Use Special Needs Trusts, part 3: A Plan for Rachel

In the seminar on Special Needs Trusts I introduced Rachel, a young lady with special needs. Here I will go over some of the particulars of her life and the types of benefits that she receives. From there we will calculate what savings will be required to be held in a Special Needs Trust to maintain Rachel’s lifestyle.

Here we will focus on third party special needs trusts. In Rachel’s case, her parents are planning to fund the trust from their estate. Keep in mind that estate is just a fancy way of saying from their assets and savings. Since Rachel is an only child her parents don’t have the concern of equitably distributing their assets among their children.

Rachel is currently 15 years old and lives with her parents. For the sake of simplicity in this example we will say that she is not employed. Rachel’s parents are currently in their mid 40s. They expect that they will be able to continue to care for Rachel at home until they retire at 65. That gives them 20 years to fund the Special Needs Trust and have enough for their own retirement.

From their research and using the benefits that Rachel currently receives they know the following. Rachel’s SSI plus NJ supplement come to $802 a month. They expect that Rachel will qualify for section 8 housing and are assuming a $1,500 benefit a month. Rachel qualifies for the food stamp program called SNAP. The SNAP program provides a benefit of $192 a month toward groceries.

Rachel’s parents would like Rachel to continue to pursue her hobbies and social activities when she is living on her own. The family has always vacationed a couple of weeks at the shore. They would like to provide for Rachel to continue to do the same along with a caregiver at least one week a year. Rachel also takes karate classes during the year to stay fit. In addition, they would like to provide for occasional evenings out with friends at the movies or a restaurant. In total they estimate these expenses come to an additional $1,000 a month on average.

For the sake of simplicity, we will assume that Rachel’s living expenses are covered by a combination of the government benefits that she receives and the $1,000 a month budgeted from the trust.

Rachel’s parents want to assure that once they are retired the trust will have sufficient resources to provide for Rachel for 50 years. To accomplish their goal her parents plan on saving $5,000 a year in the trust over the coming 20 years until they retire. In addition, out of their current savings and investments they believe that they can earmark $200,000 for eventual inclusion in the trust. This additional funding might come from selling property, a retirement account, or from life insurance. The parents will need to consider all this in the context of their own retirement needs as well.

For this illustration let’s say that the parents have an investment account that will be used to fund the Special Needs Trust once they retire. All monies will be invested at a moderate level of risk with 60% in stocks and 40% in bonds. In the diagram below we show the results of this savings plan. All numbers are in today’s dollars to make it easier to think about the sums involved.

Performance is hypothetical. It does not reflect trading in actual accounts. These results do not reflect management or trading fees. Future results may vary.
Illustration created with RightCapital financial planning software.

By the time her parents retire Rachel can expect to have approximately $500,000 available for her trust. Those funds, according to our simulation above, has a 92% chance of lasting until she is 85 years old. In fact, at the end of the plan we are projecting the trust has $1.3M in funds available on a median basis. The median result is the dark blue line in the above diagram.

That may sound like a big result but what’s important to Rachel’s parents is the protecting against running out of funds. For that we need to look at the light blue shaded area in the diagram. As you can see, by the time Rachel approaches her 80s the bottom portion of the light blue line is pressing against the $0 boundary. Roughly speaking, that’s how the 92% chance of success is calculated. There is an 8% (100%-92%) chance that the trust runs out of funds.

Given that we are planning 70 years into the future Rachel’s parents can use this plan as a good starting point. Should it look like the plan will be underfunded as they approach retirement they can take the appropriate decisions to address the shortfall. What’s important is that they have taken the time to estimate their needs and their capacity to fund them. With these steps they have gone a long way to providing Rachel with a good quality of life as she ages.

In our next installment I will discuss a situation where a young man inherits from his grandparents and how that affects his benefits.

How to Use Special Needs Trusts, part 2

In the first part to this series I gave you the basic outline and purpose of having a special needs trust. The two major categories for special needs trusts are the first person trusts created with the beneficiary’s assets and the third person trusts created with the assets of a third party, typically the parent or other family member.

In today’s installment I will describe the subcategories of each type of trust. Once these basics are in place I will give examples of how each major category might be used in the next part of this series. These examples will show you how one can use these trusts to make a difference in giving your special needs child a better life.

First Person Trusts

The first person trust, to refresh your memory, is created using the assets of the beneficiary, the special needs child. As a condition of allowing the creation of these types of trusts the Social Security Administration and Medicare system require that any assets left in the trust at the end of the beneficiary’s life be used to pay back any Medicare costs incurred on behalf of the beneficiary. The benefit to the special needs child is that these trusts allow them to qualify for public benefits that their assets would otherwise disqualify them from receiving.

A first person trust can come in one of two flavors. A self-settled trust is created when the beneficiary has significant assets. The reason is that a self-settled trust needs to be able to bear the burden of the costs of the administration of the trust. This would include costs for trustees, accountants and management.

A second option for those with more modest assets is to use a pooled trust. A pooled trust is a special type of trust operated by a non-profit. The non-profit pools the resources from various beneficiaries to more efficiently manage the trust’s assets. With these types of trusts it is common for any assets remaining at the end of the beneficiary’s life to remain in the trust for the use of the other beneficiaries in the pooled trust. In this case, the state Medicare will not seek to collect for services provided.

Third Person Trusts

In the second category, a third person trust, also called a supplemental needs trust, is created using the assets of a third party. This trust is typically created by the parents of the special needs child but it can be created by anyone with an interest in the welfare of the beneficiary. In contrast to a first person trust, a supplemental needs trust does not have any pay back requirement to Medicaid. Assets that remain in the trust at the end of the beneficiary’s life can be distributed according to the wishes of the settlor of the trust. The settlor is the person creating the trust.

A supplemental needs trust may be created in one of two ways. A common way that was used when we created a trust for our son was to create a testamentary supplemental needs trust. The testamentary trust goes into effect when the settlor of the trust passes. In the case of a married couple this might happen when the second spouse passes on. This can be an effective tool when only the parents’ estate is used to fund the trust. However, when there are other family members or friends that would also like to bequeath a gift to the special needs child a different path could be taken.

The other option for creating a supplemental needs trust is called the intervivos trust. As the Latin name suggests, this is a trust that is created during the lifetime of the settlor(s). Since it is active at all times the intervivos supplemental needs trust is an excellent tool for lifetime giving and for receiving inheritances. So a grandparent that wants to leave a gift for their special needs grandchild can use the intervivos supplemental needs trust as the recipient of the gift.

There are two other advantages the intervivos trust has over the testamentary form of the trust. The first advantage is that the intervivos trust can be named as a beneficiary of a qualified retirement account such as an IRA or 401K. The second advantage is that the intervivos trust allows the settlors (creators) of the trust to see the trust in action during their lifetime.

Using an intervivos supplemental needs trust the settlors can fund and begin using the trust to provide benefits to their special needs child during their lifetime. The settlors might begin as the trustees working out the mechanics of managing the trust to their satisfaction. As they need to the settlors might then transition to a successor trustee to continue the administration of the trust. The peace of mind that this might give you may be sufficient reason to go down this path.

In our next installment I will give you some examples that make more real how these trusts might be used to provide a better life for your special needs child.

How to Use Special Needs Trusts series, part 1

image source: http://www.cunninghamlegal.com

In preparing for a recent seminar on Special Needs Trusts my main intent was to make the vast amount of material accessible to folks. As a result I focused primarily on 3rd party Supplemental Needs Trusts and just hit the most important points. In this series of blog posts I will recap the seminar I gave and give a bit more detail on the other types of Special Needs Trusts you may need.

Today we will cover the overview of the types of trusts available to people with disabilities. First, let’s start with what a Special Needs Trust is and what its purpose is. A Special Needs Trust is a type of trust that is created for the purpose of providing benefits to a recipient with a disability. The person creating the trust is called the settlor and the person receiving the benefit of the trust is called the beneficiary. There’s one more entity involved in the trust and that is the trustee. The trustee’s job is to make sure that the terms of the trust are being upheld and the beneficiary is receiving what is due to them. We will go into more detail into a trustee’s duties later in the series.

The primary purpose of a Special Needs Trust is to allow the person with the disability to qualify for public benefits. For parents and family or friends that set up a 3rd party supplemental needs trust there is an additional consideration. The settlor creating the supplemental needs trust wants to assure that they leave a legacy that cares for their special needs child and that will be administered according to the terms of the trust. As a legal tool for carrying out their wishes a settlor can be confident that their special needs child will be taken care of so long as the trust remains funded.

I have hinted at it so far but let’s now talk more directly about the two types of Special Needs Trusts. A first party trust is a trust created with the assets of the special needs child. This might happen in the case where a large inheritance is received by the individual as in the case of a well-meaning grandparent. Alternatively, the disabled person may receive a judgment from a lawsuit in an incident that resulted in his/her disability.

A third party trust, also called a supplemental needs trust, is created with the assets of a third party such as a parent or other family member. The main distinction between the two trusts has to do with the assets remaining at the end of the beneficiary’s life. Once the beneficiary passes, the assets that remain in a first party trust are used to pay back any Medicaid expenses incurred by the state on behalf of the beneficiary. For this reason these types of trusts are also called payback trusts. Once the state is paid any remaining funds may go to a remainder beneficiary.

In contrast, a third party trust has no obligation to pay back the state for Medicaid costs. Once the beneficiary passes the remainder of the trust can be given to charity or to other family members or friends. Medicaid allows this because the assets in a third party trust do not contain any assets of the beneficiary. For this reason it is essential that a special needs child’s assets not be commingled with the assets of others to form a trust.

One more item bears mentioning in regards to the first party trust and Medicaid pay back. That is, if the funds of a first party trust are exhausted at the end of the beneficiary’s life then the state will not be paid back for providing Medicaid. Medicaid will only be paid back to the extent that funds exist in the first party trust.

For special needs children that have both types of trusts in place it is therefore prudent to first spend down the first party trust. Since the third party trust has no obligation to pay back Medicaid any funds remaining in the third party trust after the beneficiary passes can be used as the family wishes.

In our next installment in this series I will delve a bit further into the categories of first and third party trusts that are available to families.

Planning for Benefits

The needs of a family with a child with disabilities are much more complex than for most families. Most parents need to plan for their children going to college and for their own retirement. A special needs family has these goals as well as those of caring for the child with a disability. That includes providing for living needs, a quality of life, and his/her care.

The added goal of providing for a child with a disability makes creating a financial plan that much more important. The place to start is to recognize what your goals are. If you have other children, what level of support will you give them as they complete their education? For your retirement, when do you expect to retire and what type of lifestyle do you expect to have? For your child with a disability, at what point will they live separate from you and how will his/her lifestyle be maintained?

For all but the most wealthy, providing for a child with a disability will necesitate relying on government benefits and services. One of the most important things you can do in this regard is to assure that your child’s access to these are preserved. Government benefits and services are meant to provide for your child’s basic living needs.

We need to be mindful that the role of government benefits is to provide for basic needs for your disabled child. Any attempt on your part to provide for these basic needs will likely result in reduced benefits. For example, while your child lives with you his/her SSI will be typically be reduced by 1/3 to account for the free room and board that he/she receives.

Your job as parent is to supplement government benefits with those things and experiences that will enhance the life of your child. Those extras are what make a life worth living. They may include providing for on-going support of hobbies, vacations or outings or it may consist in providing therapies that are not otherwise covered.

As an example, let’s consider the case of Rachel. Rachel is 18 and lives at home with her parents. Her parents’ income is $200,000. Rachel has qualified for SSI, Medicaid and the food stamps program called SNAP. Since she lives at home free of charge her SSI benefits have been reduced to take this into account. Full SSI benefits are $750 a month but since she lives at home with free room and board these are reduced by a third. Rachel’s SSI benefits come to $500 a month.

When Rachel moves out of the house her benefits will be increased to the full $750 a month. At that point, group housing will be supplemented by Medicaid and/or the department of DDD here in NJ. Her parents will continue to supplement her benefits with outings to the movies and music concerts.

What the financial plan does for you is to organize what services/benefits will be provided, how much they will provide toward achieving your goal for your child, and how much you will need to set aside to make up the difference. And you will need to do this in the context of your own retirement needs as well as providing for the needs of other children or family members that may depend on you.

This may seem a daunting task but with a plan in place, you can begin the process that will ensure you reach your goals for your family.

Note 1: Reduction for in kind benefits for living at home, link.
Note 2: Residential services in NJ through DDD and Medicaid, link.

Approaching 18? Some things to consider to qualify for SSI and other benefits.

As our kids approach 18 there are a couple steps that we should all be aware of to protect their access to government benefits. For New Jersey residents these benefits will consist of Supplemental Security Income (SSI), Medicaid, and food stamps (SNAP). A successful application for SSI provides access to all three programs.

The main thing that you’ll want to look out for is that assets in your child’s name are under the $2,000 asset limit from the period beginning 36 months before your child applies for benefits. The 36 months prior to application is often referred to as the look-back period.

The Social Security Administration (SSA) uses the look-back period to look for asset transfers to 3rd parties. These kinds of transfers are often done to get assets under the $2,000 limit so that the child qualifies for benefits. However, if is these transfers are done within the 36 month window they may serve to disqualify your child from receiving benefits for some time.

There are two cases we will consider here. The first case is one in which your child has a modest amount of assets in their name. By a modest amount I mean an amount that your child might reasonably be able to use within the 36 month look-back period. In the second case we will consider the options you have when your child has significant assets in his/her name.

If your child has a modest amount of assets in his/her name you can work around these limits using what is called the spend-down rule. Any time within the 36 month look-back period the SSA allows for normal living expenditures that are for the benefit of the child. These expenditures serve to reduce the assets in his/her name and can therefore be used to qualify for benefits.

What’s important here is that you maintain good records including receipts and stating the purpose of the expenditures. Normal living expenditures might include food, clothing, and vacations.

Say your 15 year old child has $10,000 in their name given to them by a grandparent. You have the next 3 years to spend down those assets to meet the SSI qualification limit of $2,000. As you pay for their clothing, school supplies, activities and family trips document and keep receipts for all expenses. The SSA will look for evidence that the expenditures were a normal part of living and that they were made at fair value.

If your child has significant assets in his/her name there is another option that you can consider. In such a situation it is not practical to use the spend down approach. Rather you will need to create a self-settled special needs trust on behalf of your child. The SSA permits your child to transfer assets to a self-settled special needs trust in order to allow him/her to qualify for benefits. This type of trust is reviewed by the SSA to assure that it meets their requirements.

There is a catch here that you should be aware of. The catch is that any remaining assets at the time of your child’s passing must be used to reimburse the state for any medicaid benefits received. For this reason, in this situation, you will want to spend these assets before spending funds from any other sources.

Consider the case where your child has already been left a substantial inheritance of $1,000,000 by a grandparent. Often times grandparents and other caring family members will leave gifts not realizing the impact that these gifts can have on applying for or maintaining government benefits. The solution is to create a self-settled special needs trust in the name of your child. Once an account is created your child can then transfer sufficient assets to the trust in order to qualify for government benefits.

One very good way to sidestep assets accumulating in your child’s name is for you to create a special needs trust for the benefit of your child. These are technically called 3rd party special needs trusts because the assets used to fund the trust come from a third party, typically parents or other family members.

Make the trust known throughout your circle of family and friends who may give your child gifts over his/her lifetime. In this manner you give your family and friends a way to give a gift to your child without jeopardizing your child’s access to government benefits.

The above considerations outline the broad steps that you should consider in managing your child’s assets. To set up an appropriate special needs trust I advise that you consult with a qualified attorney.

Note 1: SSA manual on look back period for transfers
Note 2: SSA manual on spend down of cash
Note 3: SSA manual on exception for transfers to a trust
Note 4: New Jersey DDD on medicaid eligibility

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Planning for your child’s best possible life!

Hello and welcome!

I started this blog to help educate parents with special needs children. My mission is to support parents in giving their special needs kids the best possible life that they can have.

My focus will be on the resources that are available, the government benefits that can provide basic support, and the financial planning required to supplement benefits to really add to your child’s quality of life.

I will also touch on the legal considerations that you should be aware of as you go forward in planning. Having the right legal framework can go a long way to safeguarding your child’s access to benefits. It can also help assure that your wishes are carried out when you are no longer around to oversee how resources are used.

Best wishes and happy planning!