Special Needs Trusts

SPECIAL NEEDS TRUSTS Learn How You Can Provide Future Care for Your Special Needs Loved One Through Creating a Special Needs Trust

DEBORAH SEXTON ARKANSAS ESTATE PLANNING ATTORNEY

A Special Needs Trust is a particular type of trust meant just for that purpose – providing future care for someone who is disabled.

A trust is an estate planning tool that allows you to set aside money and other assets for a beneficiary for a particular purpose. The trustee you select to hold and manage that property will be responsible for making certain that the terms of the trust are fulfilled. Trusts are a vital tool in estate planning. This is especially true when the future needs of a disabled individual are at issue.

A Special Needs Trust is a particular type of trust meant just for that purpose – providing future care for someone who is disabled. When the caregiver of a disabled individual is no longer capable of caring for that person, the trust will provide the assets necessary to continue care. A Special Needs Trust is irrevocable (cannot be canceled) and the assets in the trust are protected from lawsuits and creditors. A Special Needs Trust also protects the funds so they do not count as financial assets for eligibility purposes when applying for government benefits.

TWO BASIC TYPES OF SPECIAL NEEDS TRUSTS There are two types of Special Needs Trusts. A General Support Special Needs Trust is seen as the primary source of benefits for the disabled. A Supplemental Care Special Needs Trust, which is the most common type, is a secondary source of benefits after government benefits are exhausted.

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“Special needs” is a comprehensive term that includes medical and health-care services as well as a wide variety of related services that increase the beneficiary’s “quality of life.” All of these options can be tailored to the needs and circumstances of each intended beneficiary. When the beneficiary’s medical needs are provided for, the Special Needs Trust can also provide additional services, such as assistance with daily living activities. Providing respite care for the primary caregiver is also an important consideration. The trust assets can pay for living arrangements or renovations needed to the beneficiary’s home.

Determining the appropriate type of Special Needs Trust requires consideration of many factors such as to whom the assets belong and whether they are likely to cover the full cost of support and care for the beneficiary. If the assets and resources will likely be sufficient, then a General Support Special Needs Trust may be the right choice. Otherwise, if need-based government programs will play a critical role in funding the beneficiary’s care, then a Supplemental Care Special Needs Trust may be the appropriate solution.

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HOW IS A SPECIAL NEEDS TRUST ESTABLISHED? A Special Needs Trust can be created during the lifetime of the caregiver or through a last will and testament. The trust becomes effective when it is signed and notarized. A tax identification number must be obtained from the IRS and

then a bank account will be opened with a minimum deposit. At that point the trust can be funded through a variety of methods.

Usually, the grantor (the person executing the trust document) names himself or herself as trustee. Another person should also be named as the successor trustee to take over the trust if the initial trustee dies, becomes incapacitated or resigns.

Anyone who acts as the trustee is legally bound to follow the terms of the trust document and use the property only for the benefit of the person with special needs, as identified in the terms of the trust.

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HOW IS A SPECIAL NEEDS TRUST FUNDED? A Special Needs Trust can be funded either by a parent, relative or other thirdparty or it can be funded with the beneficiary’s own assets, which is known as a “self-settled” Special Needs Trust. In the case of a self-settled Special Needs Trust, federal law requires that the trust reimburse Medicaid when the beneficiary dies. The reimbursement would come from whatever property remains in the trust. Federal law has a few additional requirements for a self-settled Special Needs Trust. First, the beneficiary must be “disabled” as defined by the Social Security Act, that is, “unable to engage in any substantial gainful activity as a result of his or her disability.” The beneficiary must also be under age 65 when the Special Needs Trust is established and funded with the beneficiary’s assets.

If the person is over age 65, however, only a “pooled” Special Needs Trust is available for a self-settled trust. A pooled Special Needs Trust is created through a non-profit organization, where the funds of several beneficiaries are pooled together. Those joint funds are then managed and invested on behalf of the beneficiaries by the non-profit organization. Any money left in the trust when the beneficiary dies is used to help others with disabilities.

A “third-party” Special Needs Trust (funded with assets from others) is not subject to the Medicaid payback requirement. All property remaining when the beneficiary dies may be distributed in the manner directed by the terms of the

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trust. Another advantage of a third-party Special Needs Trust is that there is no age limitation or specific disability required.

ADMINISTERING THE TRUST After the trust is funded, the trustee becomes responsible for using the funds from the trust to support the beneficiary, while protecting eligibility for necessary government benefits. The trustee is also expected to pay taxes, keep all necessary records of transactions and keep up with the beneficiary’s needs.

Although practically any type of property can be held in the trust (i.e., real estate, stocks, jewelry) cash is what is needed to pay for items that aren’t provided by SSI or Medicaid. Therefore, a Special Needs Trusts will generally authorize the trustee to sell tangible items in order to raise cash. Also, since the purpose of a Special Needs Trust is to improve the beneficiary’s quality of life, the types of products and services that can be paid for out of the trust funds are very broad. In fact, nearly anything that is neither illegal nor contrary to the terms of the trust are allowed.

As with most trusts, the Special Needs Trust is terminated when its purpose has been served and it is no longer needed. If the funds run out, the beneficiary is no longer eligible for or no longer needs government benefits or if the beneficiary dies, the Special Needs Trust will be terminated.

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About the Author Deborah K. Sexton As the sole attorney in the Fayetteville law firm of Deborah Sexton Law Office, Deb oversees a practice devoted to providing clients with the best in estate planning.

Deborah Sexton, C.P.A., J.D., L.L.M., combines an extensive background in accounting with a wide range of legal experience to provide her clients with a uniquely practical perspective. An attorney since 1983, she now devotes her practice primarily to estate planning and elder law.

EXPERIENCE After obtaining her undergraduate degree in accounting from Abilene Christian University in Abilene, Texas, she worked in Dallas in public accounting for several years, and then went to the University of Arkansas Law School in Fayetteville. Upon graduating from law school, she went on to obtain an L.L.M. degree in Taxation from New York University.

Deborah Sexton Law Office www.arkansas-estateplanning.com 2766 Millennium Drive Fayetteville, AR 72703 Phone: (479) 443-0062 Fax: (479) 443-2001

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