Fleming & Curti, P.L.C. - We Tackle A Reader’s Questions About Special Needs Trusts

AUGUST 29, 2005 VOLUME 13, NUMBER 9

In Which We Tackle A Reader’s Questions About Special Needs Trusts

At Elder Law Issues we sometimes hear from readers with questions or suggestions. Edith Katz of New York, for example, wrote to ask about special needs trusts. Her questions are straightforward and important, and with her permission we list them—and, we hope, answer them—here. Before we do, however, please remember that the lawyers at Fleming & Curti, PLC, are licensed to practice in Arizona (and two of us in Montana, though we do not actively practice there). We do not practice in New York and do not mean to give specific legal advice here. We can offer some general advice, perhaps more practical than legal, about estate planning for children with disabilities. Ms. Katz's questions:

Would you advise the formation of a special needs trust for a developmentally disabled son?

Absolutely. That is the exact circumstance in which a special needs trust is best used. When you leave your assets to such a trust for your son, daughter or other beneficiary with a disability, the particular kind of special needs trust you create is usually called a "third party" trust. That kind of trust usually can have very generous rules and still retain your child’s eligibility for Medicaid, SSI and other benefits.

Leaving a portion of your estate outright to a child with disabilities can actually make things more difficult for them. In many communities the services available to public benefits recipients are more diverse, better coordinated and often more appropriate than similar services that could be purchased with your child’s outright inheritance. In addition, failure to create a special needs trust can force your child into the legal system, where the courts will appoint a guardian and/or conservator, and insist on carefully monitoring the use of funds for his or her benefit. While that may sound like a good thing, it is almost always expensive, invasive and ultimately unsatisfactory—particularly if there is a suitable person to act as trustee of the special needs trust.

Is it safe to create a Special Needs Trust while we are still living, as laws seem to change?

Yes, for two reasons. First, though there have been changes to the law (and more are expected), none of the changes seriously discussed will make special needs trusts obsolete. Second, and more importantly for your circumstance, most of the changes we are likely to see will focus on trusts created from the money belonging to the person with disabilities. In other words, failure to create a special needs trust while you are still alive will likely subject your child to more changes in benefits and the law of trusts.

Besides, we routinely provide for amendment of special needs trusts to accommodate changes in the law. While the issue is complex, it is too important to shrug your shoulders and say "you can’t fight city hall." In fact, special needs trusts can be very flexible and effective—and they are, every day, in every community.

Is there a simple way to create such a trust?

Yes, there is. But this kind of trust really should be established by someone who really knows how the benefits system works. You might check out the website of the Special Needs Alliance at www.specialneedsalliance.com; its members are committed to keeping abreast of changing benefits rules, and are experienced at establishing special needs trusts and advising trustees.

Should the special needs trust be funded by assets that we gift now, or should we leave the trust as a beneficiary of our estate?

Although opinions reasonably differ, at this point we recommend creating your special needs trust as a separate entity and "funding" it (that is, transferring at least some assets into its name) now. That gives you a chance to see how much trouble the trust administration will really be, so that you can determine whether your chosen trustee is up to the task. It will also give you a chance to submit the trust to Social Security, Medicaid and other service providers; it is better to find out if eligibility workers will need to be brought up to speed when there is $3,000 in the trust than later, when it has inherited a share of your estate and you are no longer around to make changes. The trust can then be named as beneficiary of a share of your estate, so that the bulk of its assets are received after your death.

Please remember, again, that we do not practice law in states other than Arizona. Still, we can give some insight into general questions like Ms. Katz’s, and we do enjoy hearing from our readers.