Preparing for the future of a special needs person is crucial to their standard of living, especially after you have passed away. With some planning, it is possible for your child to have SSI and Medicaid benefits while also benefiting from a trust fund that provides money for other purposes.
If you do not make a plan, a child with special needs may eventually end up living with only basic needs met. The good news is that if you prepare well, your special needs child can thrive even after you die and enjoy a full and enjoyable life.
Look Before You Leap
As you plan, there are important steps to take. It is always best to look into your options before you start saving up for a special needs child’s future benefit.
- Apply for government benefits including SSI and Medicaid to cover medical and basic needs after your child reaches the age of 18
- Create a letter of intent to let everyone know what is important in the care of your child. Eventually, as an adult who has been declared incompetent, your adult child will have a guardian. If this person is not you, you will want them to understand important information such as which doctors you go to and what types of medications your child is taking, which pharmacies you use, and where they have had therapeutic treatments in the past. There needs to be some kind of record of your child’s medical and mental health so that there is a continuity of care.
- Create a special needs trust after careful study of the different types available to fit your specific needs.
3rd Party Trusts (Special Needs Trusts)
3rd party trusts are usually established by parents who are careful planners and understand the importance of a trust that can operate to financially support their child without causing an interruption in Medicaid or SSI assistance. There are a few different ways to set these trusts up. You can write it to take effect immediately which is called an Inter Vivos or Living Trust or you can plan for it to take effect after you die as a part of your will, called a Testamentary Trust.
Before Age 65
No matter how you create a 3rd party trust, the most important thing to remember is that it must be done before the child reaches the age of 65 and before the money is left to your child.
The Best of Both Worlds
If your child inherits money that is given directly to them instead of through the distribution of a trust, that money disqualifies them from receiving their Medicaid and SSI supplementary benefits until the money runs out. In essence, the inheritance money is spent on essential needs that should have been covered by the state run program.
Medicaid and SSI are for those who cannot afford shelter, food, and medical care on their own. If you leave an inheritance of $50,000 directly to your child, they lose their Medicaid and SSI. The entire $50,000 inheritance is spent on the essentials that should have been covered by Medicaid and SSI. The inheritance is swiftly lost without proper planning. A 3rd party trust prevents this scenario from happening.
Without planning, the inheritance cannot be saved to use as the child needs. Only a trust can keep money for the benefit of the child and not interrupt their benefits from the state.
NO Medicaid Payback Provision
Medicaid Payback Provision law requires that any money left after the child passes away has to revert to Medicaid to pay for the care they received over the course of their life. With a 3rd party trust, you can instead direct where the leftover money goes. The money in a 3rd party trust is NOT subject to Medcaid Payback Provision law. If your child has a sibling that you wish to inherit any excess monies, you can write that into a 3rd party trust.
1st Party Trusts (D4A Trusts)
1st party trusts are not as good for a special needs child for many reasons. These trusts are often seen when parents have not had time to prepare for a special needs child who suddenly inherits money. The benefits are not as good as with the 3rd party trust.
Often a court decision puts a settlement for injuries into a 1st party trust managed for the child’s benefit by a trustee. 1st party trusts are also created if a special needs child is over the age of 65.
Medicaid Payback Provision
1st party trusts are subject to the Medicaid Payback Provision. This means that once the child passes away, Medicaid has to be repaid for all of the benefits the child received. If you have a 1st party trust, it is difficult to be sure if you are spending too quickly or too slowly to use the money properly.
Planning Without a Trust
Parents often think that naming a sibling or an aunt or uncle to manage the money is a good idea. They assume that the relative will take care of the child using the money. Even with the best intentions by both parties, this situation can mean trouble for the special needs child.
- Sued: If the relative is sued for whatever reason and has to pay, the money left to your child is accessed by a 3rd party with rights to the money.
- Divorce: If the relative goes through a divorce and the money is part of an equitable distribution claim with his wife, she can take a chunk of the money meant for the special needs child.
- Debt: If the relative loses his job and goes into deep debt, creditors can get a judgment and tap into that money for your special needs child. A bankruptcy could take all of it.
These problems can easily be prevented with a 3rd party trust. Your relative can still be the trustee and manage the trust. You can still choose them to be a fiduciary guardian. 3rd party, or Special needs trusts, create a barrier so that the assets are not accessible by others’ claims on the money.
Seek Out Wise Counsel
A special needs child is a responsibility that you need expert guidance to handle well. Do your research and know what questions to ask, but seek out someone who knows the law and can help you design a situation that your child can comfortably live with.
If you seek out an attorney, make sure they specialize in estate planning and understand the issues at stake here. This is not a simple will. A lawyer who manages traffic tickets but also does wills occasionally is not the person you are looking for to guide you. If language is used incorrectly writing up a special needs trust, you could have a problem. Find an attorney who understands the intricacies of these types of trusts and make the best possible plan for your much loved special needs child.
For more information, check out our webinar replay with Chris Wilms of Hopler, Wilms, & Hanna and David Crispin, special needs consultant. Get 10 actionable steps that will help you prepare financially for caring for a loved one with special needs. Learn more about issues such as:
- Applying for government benefits
- Creating a special needs trust and the different types available to fit your specific needs
- The importance of non-legal guidance such as creating a letter of intent