I have met with many individuals who desire to provide in their estate plans for the lifetime care of a disabled child or another incapacitated family member. Such disabilities may encompass cognitive impairment as well as physical incapacity or a combination thereof. The impairment is frequently so severe that it limits the disabled beneficiary’s ability to manage any inherited assets. Likewise, you may have read that an outright inheritance may also disqualify a disabled beneficiary from receiving certain federal or state economic benefits. In the event you are confronting such a situation, then the inclusion of a “Special Needs” Trust in your estate plan may be appropriate.
What is a “Special Needs” Trust? It is a unique Trust established in most cases by a parent or grandparent, under a separate Article contained in their Revocable Living Trust, to manage the investments (i.e., an inheritance) provided for a disabled beneficiary’s lifetime benefit. A disable child or grandchild who is receiving, or who is eligible to receive certain governmental benefits, such as Supplemental Security Income (SSI) or Medi-Cal, may become disqualified if his or her inheritance is not retained in a “Special Needs” Trust. The Trustee who manages the investments in a “Special Needs” Trust should always be a third party. The “Special Needs” Trust must also contain specific language restricting the use of assets allocated to such Trust for the beneficiary’s “special needs”. The goal of creating a “Special Needs” Trust is to allow the disabled beneficiary to inherit assets for his or her “special needs,” without being disqualified from receiving the various governmental benefits mentioned above.
In the event a client establishes a lifetime Trust for a disabled beneficiary and the Trust contains standard language directing the Trustee to make distributions for a beneficiary’s “health, education, support and maintenance” it will disqualify that beneficiary from receiving SSI, Medi-Cal and other governmental benefits.
In addition, it is important that the disabled beneficiary be unable to revoke The “Special Needs” Trust. Finally, the Trustee should be granted the authority to distribute income and principal of such Trust for the “special needs” uses of the beneficiary, instead of only making distributions directly to such beneficiary.