Special Needs Planning

Florida Estate Planning Lawyer: Provide for Family Members with Special Needs

Is there someone in your family, an heir or family member, who has or may have special needs? Does someone in your family currently receive, or potentially in the future will be receiving, government benefits for their medical or other needs? The Walser Law Firm has experience in planning for families with special needs individuals, and an experienced lawyer at our firm can help you understand how to provide for such disabilities of family members or loved ones in your estate planning so that your generosity actually benefits your loved one, without impairing his or her ability to receive other forms of support.

If you have a disabled dependent like a child with special needs or a family member in a nursing home, you, of course, want to provide for that person. But if you are thinking of leaving the person a lump sum, you should reconsider. Your generous gift could render your loved one ineligible for government benefits he or she would otherwise be entitled to, like SSI or Medicaid.

Generally speaking, a Special Needs Trust (also known as a Supplemental Needs Trust) is a better option. A Special Needs Trust is designed so that the trustee can provide life-enhancing services the government does not ordinarily cover. These services may include special wheelchairs or other equipment, therapies, medical second opinions, travel expenses, extra personal nursing care, extra services or expenses required to maintain his or her standard of living, etc.

The assets in the trust are not available to the beneficiary for the asking, but are totally discretionary. Therefore, the assets are excluded by the government when it evaluates your loved one’s eligibility for benefits.

A special needs trust is a trust designed for beneficiaries who are disabled, either physically or mentally. It is written so the beneficiary can enjoy the use of property that is held in the trust for his or her benefit, while at the same time allowing the beneficiary to receive essential needs-based government benefits. In addition to the public benefits preservation reasons for such a trust there will be administrative advantages of using a trust to hold and manage property intended for the benefit of the beneficiary if the beneficiary lacks the legal capacity to handle his or her own financial affairs.

Special needs trusts can provide benefits to, and protect the assets of, the physically disabled or with mental illness. Special Needs Trusts are frequently used to receive an inheritance or personal injury settlement proceeds on behalf of a disabled person or are funded from the proceeds of compensation for criminal injuries, litigation or insurance settlements.


Disability Trusts (First Party SNT)

These trusts are also referred to as (d)(4)(A) trusts, which alludes to where they can be found in the Federal statute that authorizes them. Due to common usage, this is usually the type of trust most people are referring to when they use the term “special needs trust.” To establish a valid Disability Trust, it must satisfy the following legal requirements.

The trust must be irrevocable and established for the sole benefit of the trust beneficiary by the beneficiary’s parent, grandparent, legal guardian, or the Court. The beneficiary must be under 65. Any assets in the trust must belong to the beneficiary. Disability Trusts require a payback provision. At the death of the beneficiary, any remaining funds must be used to reimburse the State for medical benefits provided over the individual’s lifetime.

Third-Party Special Needs Trusts

A third-party SNT is funded with assets belonging to a person other than the beneficiary. In fact, no funds belonging to the beneficiary may be used to fund the trust. Typical funding comes from gifts, an inheritance from parents, grandparents or family members, and proceeds of life insurance policies. Unlike a first-party SNT, this trust has no provision to pay back Medicaid upon the trust’s termination; rather, the person creating the trust decides how the trust estate is distributed when the beneficiary dies.

Third-party SNTs may be established inter vivos, i.e., during the Settlor’s life, or as part of the Settlor’s estate plan, e.g., under a Will or a Revocable Living Trust. The beneficiary of a third-party SNT does not have the legal authority to revoke or terminate the SNT, or to direct the use of the SNT assets for his or her own support and maintenance, therefore the SNT assets are not a countable assets for government benefit purposes.

Pooled Special Needs Trusts

A pooled special needs trust is a big “master” special needs trust with many subaccounts, one for each disabled person who enrolls in the pooled trust. By “pooling” together these subaccounts, enrollees benefit from the economies of scale. Pooled trusts can accept accounts of any size. Pursuant to federal law, pooled trusts must be administered by a not-for-profit association.

Differences Between an Individual Special Needs Trust and a Pooled Special Needs Trust

An individual special needs trust is a trust created for the sole benefit of one disabled person. Individual special needs trusts that accept deposits of the disabled person’s own funds are called “first-party” trusts. Pooled special needs trusts must be administered by a not-for-profit trustee and are created for many disabled persons at once. With first-party individual special needs trusts, the government must be repaid any monies remaining in the trust upon the death of the disabled individual. With pooled special needs trusts, the government also may be repaid but only to the extent not retained by the pooled trust itself. Congress created this rule so that the not-for-profits could retain the funds to further their not-for-profit purpose of assisting the disabled. The pooled special needs trust allows the monies to benefit disabled persons during their lifetimes and for any remaining monies to be available to fulfill the not-for-profit’s mission.

Leaving Money To Others Can Create Serious Problems

“Disinheritance” was commonly used before the use of Special Needs Trusts was officially recognized by Congress.

Disinheritance as a means of providing for a disabled or ill person puts the assets at risk. A non-disabled sibling holding assets for the benefit of a disabled sibling could be subject to such liabilities such as judgments from automobile accidents, a bankruptcy, or a divorce.

In such circumstances, the assets meant to benefit the disabled or chronically ill person could go to pay the judgment creditors or the estranged spouse of the non-disabled sibling. Using a Special Needs Trust guarantees that the funds will be held only for the benefit of the person under the disability or chronic illness, and not for any other purpose whatsoever.

Memorandum of Intent

No one else knows your child as well as you do, and no one ever could. You’re a walking encyclopedia of his or her habits, needs, and wishes. When your child has special needs, though, there’s an additional chapter, detailing medical, behavioral, and educational requirements.

So what happens if you suddenly aren’t there? First and foremost, you should name a guardian, but a memorandum of intent will be crucial in helping that individual (or Successor Trustee of a SNT) minimize disruption and disorientation for your loved one. A skilled Florida estate planning attorney will advise that this memorandum should include a description of your child’s disabilities and medical history, including all medications and dietary needs. List key contacts, educational details, and his or her schedule of therapy and other services—all the instructions necessary for day-to-day life.

The memorandum of intent should detail family history, capturing those little things that only close relatives understand: daily schedule, favorite activities, things he or she loves or hates, living arrangements that work or don’t…there’s no detail too small to ease the transition.

Because levels of disability vary, and because many people fail to recognize that, it’s important to include a list of daily activities. The ability to contribute to family life builds self-esteem, so if your child can help with the dishes, put it in the memorandum. If he or she loves to clear the table, mention that. If folding clothes frustrates him or her, it’s important that future caretakers have this information up front.

Does your adult child have a job? Does he or she want one? What type of work can he or she be successful at? Is college an option? How did you plan to pay for it? These are all questions that emerge eventually in the life of a person with special needs, and although you certainly plan to be there to help answer them, it’s important that you address them beforehand, for your child’s sake.

Income Tax Issues for Special Needs Trusts

Regardless of who serves as the Settlor of a (d)(4)(A) SNT, the IRS considers it to be a “grantor trust” with respect to the Beneficiary for income tax purposes if neither the Trustee no any other person is an “adverse party” who must consent to distributions for the Beneficiary. See I.R.C. Section 677. If a (d)(4)(A) SNT is a “grantor trust,” then all income, deductions and credits with respect to the assets of the SNT are reported by the Beneficiary under his Social Security Number on his individual Income Tax Returns, regardless of whether the income or gains are actually distributed to, or for the benefit of, the Beneficiary. See I.R.C. Section 67l. The Trustee of a (d)(4)(A) SNT that is treated as a “grantor trust” may nevertheless obtain a separate Federal Employer Identification Number for the SNT, and file an “informational” Income Tax Return for the SNT on IRS Form 1041, indicating that the income, gains, deductions and credits of the SNT will be fully reported by the Beneficiary on his Form 1040.

If a (d)(4)(A) SNT is not taxed as a “grantor trust,” it is taxed as a “complex trust” under I.R.C. Section 641. The Beneficiary of a (d)(4)(A) SNT is often in a lower tax bracket than an irrevocable non-grantor trust. In 2013, a single person reaches the 39.6% bracket at $398,351, while an irrevocable non-grantor trust reaches the 39.6% bracket at $11,950. Furthermore, a (d)(4)(A) SNT that is not a “grantor trust” may also qualify as a “qualified disability trust” under I.R.C. Section 642(b)(2)(ii), and be entitled to a deduction equal to the exemption that a single taxpayer could claim under I.R.C. Section 151(d).

Gift Tax Issues for Special Needs Trusts

If a self-settled (“first-party”) SNT provides that the Beneficiary shall have a testamentary power of appointment over the property remaining in the SNT at his death (and after the Medicaid “pay-back” is satisfied), then funding an irrevocable SNT with the Beneficiary’s assets does not result in a completed gift for federal gift tax purposes. See Treas. Reg. Section 25.2511-2(C). Even if the Beneficiary is not capable of exercising the power of appointment, the mere possession of the power is sufficient to preclude a completed gift upon funding. If the funding transfer to a self-settled SNT is deemed to be a completed gift to the remainder beneficiaries for purposes of the federal gift tax under I.R.C. Section 2501, the Beneficiary may shelter a portion or the entire gift amount by applying his federal lifetime gift tax exclusion. See I.R.C. Section 2505(a)(1).

Gifts to a third-party SNT generally will not (and should not) qualify as a “present interest” with respect to the Beneficiary under I.R.C. Section 2503(b).

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