Special Needs Trusts: Planning for the Disabled

Courtesy of Isaac Yedid, Esq. and Raymond Zeitoune, Esq.

Parents of individuals who are disabled are always looking to build financial security for their disabled children. They want to ensure that their loved ones with “special needs” will enjoy a rewarding lifestyle that includes the “extras” in life.

However, special care must be taken in providing for the well-being of children with “special needs.” Eligibility for various government benefits (often providing essential coverage of their medical and living expenses, as well as access to community programs) can be jeopardized by gifts made or inheritances left directly to children with “special needs.” An effective estate planning tool that protects funds intended to enrich the life of a loved one with special needs while preserving eligibility for public benefits is commonly known as a “special needs trust” or a “supplemental needs trust” (SNT).

An SNT allows a parent to make a gift or leave an inheritance to a child with “special needs” in trust instead of outright, protecting those funds from disqualifying the child from government programs. The assets in an SNT can be used to cover essentials not provided through government programs (such as a private nurse), or for purchases that would otherwise enrich the beneficiary’s life (such as furniture). One or more trustees become responsible for the management and distribution of the resources held in trust.

An SNT, which is authorized in New York under EPTL 7-1.12, would allow the beneficiaries to qualify for government benefits while receiving distributions from the trust if the following conditions are met: (1) the beneficiary suffers from a severe and chronic or persistent disability; (2) the trust document clearly states that the bequest should be used to supplement, not replace, government benefits; (3) the trust prohibits the trustee from using the assets in a way that may impair or diminish the beneficiary’s entitlement to government benefits or assistance; (4) the beneficiary does not have the power to assign, encumber, direct, distribute or authorize distribution of trust assets; and (5) the distributions are at the sole discretion of the trustee(s) and are not mandatory.

Parents often ask whether an SNT should be created or, alternatively, whether an inheritance should be left to other trusted members of the family directly with the intention that those trusted family members would take care of the child with “special needs.”  Leaving an inheritance directly to a third party (and not in an SNT) is usually not the best option, as there may be a disagreement as to the true owner of the money, which may create problems. For example, if a parent were to leave money directly to their daughter in order to take care of their disabled son, the daughter’s ex-husband may try to take ownership the money in a divorce settlement, or if the daughter were deep in debt, her creditors may try to collect from that money.

On the other hand, using an SNT would create a concrete plan of financial care for the child with “special needs.” The SNT would specify how the funds are to be utilized and who is to receive the funds upon the beneficiary’s death. On the other hand, if a sibling, for instance, holds funds for another sibling, there can be a discrepancy as to the true owner of the money, family problems can be created, and it is unclear whether the holder of the funds can use the money for him/herself, even if only temporarily.

However you choose to organize your affairs, what’s most important is that you create a clear, easily accessible system that will light the way for your family and friends. May we all merit living long, healthy and happy lives – amen.