Are Special Needs Trusts Always Appropriate?

When planning for a person with special needs, you have more than one option. In some situations, a special needs trust might be a good choice, but in some other circumstances, you might have a better option.

Special needs trusts are sophisticated legal documents that must comply with multiple rules. If you make a mistake, you or the beneficiary might not get the results you hope to achieve. You should consult with a California estate planning attorney about these issues, including whether a special needs trust is appropriate for your or your loved one’s needs.

The Advantages of Special Needs Trusts

Many people with special needs, including those with health issues or who are unable to handle their own financial affairs, may receive valuable government benefits like Medicaid and Supplemental Security Income (SSI) to help provide for their support. These programs may have strict income and asset limitations so that a person with economic means may be unable to qualify for these benefits. If an individual with special needs receives an inheritance, personal injury settlement, or some other windfall, for example, that money could cause them to lose these benefits or have them substantially reduced.  

Such beneficiaries may be left without the health insurance or monthly stipend they receive through these programs, and they may lose or reduce their eligibility for assistance with housing, nutrition, transportation, adult day programs, and other public benefits they would otherwise receive.  

A special needs trust can eliminate this unwanted consequence by providing that the windfall goes into a trust for the person’s benefit, rather than directly to the person with special needs. Since the trust beneficiary does not own the assets, the money will often not count as their income or assets, so they may not lose their eligibility for Medicaid or SSI.  

The Downsides of Special Needs Trusts

Along with the benefits of a special needs trust, there are also some downsides.

For example, after the individual with special needs dies, the assets remaining in the trust may go to the government to reimburse taxpayers for the money spent on the beneficiary throughout his or her lifetime. Other family members or friends may only inherit what little, if anything, remains after the government gets reimbursed. 

Also, if the trust is not set up properly or the trustee uses the assets for a purpose not allowed with these unique trusts, the special needs trust could get voided, defeating the purpose for which it was created.

Alternatives to Special Needs Trusts

There are alternatives to special needs trust, but you should be careful to ensure that those alternatives don’t limit the recipient’s access to public benefits.  

For example, you could create an estate plan to leave assets directly to the person with special needs, but you would need to be sure you consider the potential loss of that person’s benefits. If the gift is substantial, it may in some cases be sufficient to support the person even if they lose their government benefits.  Still, this situation should be avoided if possible, to ensure that the benefits remain available if needed.  

Even if the gift is sufficient to compensate for the lost benefits, it may be best to create a living trust to oversee the disabled person’s financial matters and to reduce the likelihood of someone taking advantage of the special needs individual. Also, this option may allow siblings or other relatives to eventually inherit what the disabled person does

not use. A person with a short life expectancy could be a candidate for this option.

Another alternative to a special needs trust is to leave the disabled person’s portion of the estate to a third party, like a sibling, to hold for the individual with special needs. The danger in selecting this option is that the third party might not use the assets for the disabled person, or might be swayed by another person, such as a spouse or child, to use those assets for their own benefit. Also, unless done carefully and with full transparency, this strategy could be viewed as a fraud on Medicare or SSI, causing a myriad of adverse consequences.

A California estate planning attorney could talk with you about your situation and draft the documents that meet your goals and needs. Get in touch with us today.

Loew Law Group services clients through San Mateo County including the cities of Belmont, Burlingame, Foster City, Hillsborough, Redwood City, and San Mateo, as well as in all Bay Area counties and throughout California.