One challenge families with an adult special needs child, or even spouse that may have suffered a stroke or Traumatic Brain Injury, face is trying to figure out the answer to this question: “How do I plan for my loved one after I die?” That’s a question every family asks itself, but it can be especially important in situations involving a loved one with a disability. Although it is challenging, and can feel very stressful, this aspect of planning is actually not nearly as difficult or complicated as you might believe – and in the long run, doing if the right way, with an attorney’s assistance, will save more money for your loved one. In Indiana, planning for the appropriate protection and expenditure of assets for the benefit of the special needs loved one usually involves what is called a Special Needs Trust. Special Needs Trusts serve a dual purpose: preserving your adult loved one’s eligibility for important government aid programs, and providing a framework for how assets should be managed in the future, and by whom.
Basic Terminology for Special Needs Trusts, and What They Do and Do Not Do
Before we discuss how a Special Needs Trust works, let’s be sure you understand a few basic concepts. First, a Trust, in its most basic definition, is a legal document that creates a Fiduciary Relationship between a Trustee and a Beneficiary. A Fiduciary Relationship simply means that one person or entity (the Trustee) is obligated to act in the best interests of another (the Beneficiary). A Special Needs Trust is really just a Trust, but extra language will be included in the document to account for the special needs of someone with significant disabilities, whether they’re mental or physical.
The primary goal of the Special Needs Trust is to provide a framework and instructions for the Trustee on how best to manage the assets that have been set aside for the benefit of your loved one. They also can be designed in a way that your loved one remains eligible for government-funded needs based programs.
Perhaps the most important thing Special Needs Trusts cannot do is say who will take on the Guardianship responsibilities of your loved one. Think of it this way: The Special Needs Trust deals with how your loved one’s money is spent; the Guardianship deals with who will be responsible for providing your loved one with the day to day love and care he or she will need. The Trustee of the Trust and the Guardian must work hand-in-hand to act in the special needs person’s best interests. Frequently, they will be the same person. However, although you have control over who the Trustee will be when you create a trust for your special needs loved one, only a court has the final say on who the Guardian should be.
What is a Supplemental Needs Trust?
Some lawyers may refer to something called a Supplemental Needs Trust, and treat it as something different than a Special Needs Trust. Lawyers that use that term are referring to an effort within a Trust to preserve eligibility for government-funded needs based programs such as SSDI, SSI, Medicare and Medicaid by earmarking Trust assets only for certain permitted uses. In our practice and experience, a properly prepared Special Needs Trust incorporates eligibility preservation, but also addresses so much more. So, we don’t see a need to create a Supplemental Needs Trust (and it’s not a term with any formal legal significance). Regardless, whether you think of your Trust as a Special Needs Trust, or a Supplemental Needs Trust, the fact is that it must always be specifically tailored to your family’s specific circumstances. In other words, the name on the top of the document is generally not nearly as important as the language contained within the document.
A Special Needs Trust Must Be Funded
Unless it’s funded, a Special Needs Trust is just an ineffective piece of paper. How and when to fund it depends on your family’s financial situation. For instance, you may be looking to create a Special Needs Trust because you or your loved one are set to receive an inheritance, and you don’t want them to lose out on eligibility for essential government programs like SSI or Medicaid. Or perhaps they’ve become disabled because of a major accident and a legal monetary settlement is on the horizon. Your loved one may soon be eligible for SSDI and Medicare, and you want to plan appropriately so those benefits aren’t sacrificed. Or, maybe you already have significant assets that you want to start setting aside now. This type of Special Needs Trust can also be referred to as a Living Trust or an Inter Vivos Trust, with your special needs loved one as the beneficiary. Whatever the name, they have the same goal: creation, funding and administering the Trust on behalf of your loved one while you’re still alive. This type of trust will continue to operate even after you die.
Not every family needs a “Living Trust” type of Special Needs Trust. For these families, the best way to create the Special Needs Trust may be to incorporate it into their Last Will and Testament. This is called a Testamentary Special Needs Trust. For this type of Trust, the funding ordinarily does not take place until the second spouse dies. When that happens, the Trust automatically comes into existence, and with the assistance of a skilled Indiana estate planning attorney, all of the parents’ assets will already contain the appropriate Beneficiary designations, ensuring that necessary assets descend into the Testamentary Trust.
A Special Needs Trust Needs a Trustee
It’s obvious that your special needs loved one will be the Beneficiary of the Special Needs Trust. But who should the Trustee – the person (or entity) charged with managing and using those assets – be? This decision is just as important as deciding what type of Special Needs Trust is best.
If you’re creating a Testamentary Special Needs Trust, the importance is magnified because it doesn’t come into play until the people who have been caring for the special needs loved one his/her entire life are no longer alive! Most commonly, if they are available and willing, siblings of the adult special needs loved one, may be appropriate candidates. Perhaps even adult grandchildren. However, not everyone has the so-called “obvious” choices available, which is why using a Trust and Estate Planning attorney will help address contingencies that may not have obvious solutions.
If you’re creating a Living (i.e. Inter Vivos) Special Needs Trust, you and/or your spouse are usually the obvious Trustees. But you can’t forget that a Living Trust for a special needs loved one will survive your and your spouse’s death. So, you have to think about who will carry on management of this Trust even after you both die. As with the Testamentary Special Needs Trust, siblings or other adult grandchildren may be good contingency Trustees.
Sometimes, however, naming individuals as Trustee isn’t feasible. This could be due to the (lack of) availability of appropriate family or friends. You may not find people willing or able to take on the special challenges that come with caring for a special needs loved one. And, let’s face it, sometimes there just isn’t anyone you trust to do the job right. In some fortunate situations, the sheer value of the trust may compel creative Trustee considerations. In those situations, an Institutional Trustee may be a good option. An Institutional Trustee may be something like the Trust Department of your local bank.
The benefit of Institutional Trustees (so long as you do your research) is their proven experience in managing Special Needs Trusts. The investing options available to an Institutional Trustee can help a Special Needs Trust actually grow in size. There’s also a source of accountability in the event the Trust is mismanaged.
The downside is that Institutional Trustees manage multiple Trusts, so the attentiveness that an individual Trustee with a special connection to the loved one may provide can be lacking. Also, Institutional Trustees are guaranteed to charge annual, or sometimes monthly, administrative fees that can eat away at Trust assets, particularly for small Trusts.
In Indiana, there is yet another subcategory of institutionally managed Special Needs Trusts, called Pooled Special Needs Trusts. A well known example is the two Master Trusts created by ARC of Indiana. The supposed benefit of a Pooled Special Needs Trust is that the collective assets of the trust can be invested responsibly and grow. Though the assets are pooled for investing purposes, each trust beneficiary has an individual account, and if the investments do well, the beneficary’s own account does well. The upside, of course, is the professional management much like a bank’s trust department. The downside is there is no room for customization to account for your loved one’s specific needs or your family’s financial situation. The ARC Master Trusts are frequently seen as an option of last resort.
At Salmon & Hewins, we don’t ever recommend that a family without a special needs loved one use legal documents off the internet to plan for the future. But if you try to do this with a special needs loved one, you most likely will be doing a disservice that will cost him/her money and jeopardize eligibility for beneficial government aid programs. From understanding exactly what a Special Needs Trust can do, to helping decide which type of Trust is best, deciding on the best Trustees and even planning your own Estate to maximize the benefit for your special needs loved one, the attorneys at Salmon & Hewins in Evansville can help.