We’ve learned what a Special Needs Trust (SNT) is and how it works.
Now the question is how the SNT fits into a comprehensive estate plan.
Because SNTs are very specialized – it is a long-term plan intended to benefit a child or other dependent with special needs.
Most people do have broader concerns that would need to be covered by a complete estate plan: their own healthcare needs, a financial POA, and other children and family members.
In addition, there are benefits why a coordinated estate plan is better at providing you protection for your family’s legacy.
In this article we take a look at how the SNT fits into the broader context of a more comprehensive estate plan.
Why an SNT is Only One Part of the Plan
As useful as an SNT is, it cannot handle other, broader concerns that you might want your estate plan to consider, including:
- Distributing your assets to other heirs
- Nominating a guardian for minor children
- Having a financial or healthcare POA for yourself
An SNT does not exist in a vacuum. And while for you, as a parent, a large part of your concern might be the long-term welfare of a child with special needs, there are other things that would also need to be taken care of, not the least of which is yourself and your other family members.
But a broader estate plan must also be carefully coordinated within itself to make sure any benefits or advantages you put in place are not canceled out within your own estate plan.
The Revocable Living Trust is Foundational
For many, the foundational estate plan is a revocable living trust. It allows you to avoid probate while at the same time providing for the management of your assets should you become incapacitated.
Upon the grantor’s death, a revocable living trust becomes irrevocable, and the trust assets are then distributed according to your wishes.
From here you have a few options. You can certainly create a standalone SNT. Others can create a living trust that incorporates an SNT so that the living trust funds the SNT should both parents pass away.
Effectively when the parents pass away, the living trust handles the distribution of assets to the beneficiaries, while at the same time directing that the “share” of the child with special needs is transferred to the SNT designed for the benefit of the child.
This way, the child never actually becomes the owner of his share in the trust assets, and his eligibility for government aid is not compromised.
It must be kept in mind that eligibility to government needs-based programs like the Supplemental Security Income (SSI) determines eligibility based on the assets or resources owned by the beneficiary in his own name.
Medi-Cal, on the other hand, has removed the asset limits test in 2024, but has recently reinstated asset limits in certain Medi-Cal programs, particularly for older adults and people with disabilities.
This is important because while there is no current asset limits test for many of the Medi-Cal programs to which your family may be applying, it does not mean that regulatory changes will not later be put into effect that can affect your child’s eligibility.
Hence, the importance of avoiding a direct transfer of asset to a child with special needs, and for whom government aid programs may prove to be essential for their long-term care.
Avoiding the “Empty Vessel” Problem
Setting up your estate plan so that a revocable living trust is designed to incorporate an SNT also solves one crucial but common problem in the field of living trusts.
This problem is what many in the industry refer to as the “empty vessel” problem.
This happens when a person sets up a trust but does not fund it.
The trust documents and signed, all is in order. They become the trustee and continue managing the properties intended for the trust. Whether intentionally or unintentionally, perhaps because they mistakenly assume that control of assets as owner is the same thing as control of assets as trustee, they neglect to actually transfer the assets to the trust.
That means that the trust remains unfunded, and basically useless for its purpose.
Creating a living trust that automatically triggers a transfer of properties or assets into an SNT solves the problem of an unfunded and not functional SNT.
This assumes, of course, that the living trust has also been property funded.
This is why it is important to make sure to create a coordinated estate plan with the assistance of a family trust lawyer who can assist you from strategizing, drafting, signing, and ultimately the funding of your trust.
Planning for Incapacity
While certain incapacity planning can be handled through a living trust – doing so is limited. At the most, doing so only allows the successor trustee to manage trust assets.
But most of us still need the additional protection of a durable power of attorney and an advance healthcare directive.
If you become incapacitated for any reason, a durable power of attorney allows a person you trust to help manage your finances, which may include the task of funding or even managing the SNT on your behalf.
An advance healthcare directive, on the other hand, allows you to designated someone you trust to make sure that your choices are carried out in terms of your medical care.
Your Last Will and Testament
Many people start and stop their estate plan with a will. Most family trust lawyers will tell you a will is often insufficient. But even if you concede that you need a living trust, it does not dispense with your need for a will.
There are at least two things that a will can provide your overall estate plan, within the greater context of a living trust:
- It allows you to nominate the guardians for your minor children; and
- A pour-over-will acts as a safety net to capture assets you may have forgotten to put into your living trust, and “pours” it into the trust
It bears mentioning that a Will is the traditional legal document where you can nominate a guardian for minor children. This is something that cannot be done through a living trust.
The trustee of a living trust is tasked with managing or administering trust properties. The same is true for the trustee for an SNT. But a guardian is the fiduciary to whom you are entrusting the physical custody and care of your minor children should anything happen to you.
The guardian of minor children has different responsibilities from a trustee. They are the ones who will look after your child on a daily basis and provide the daily support your child needs. A child’s guardian makes the personal decisions for your child – at least until your child reaches adulthood.
While you may select only one person to be both trustee and guardian, for instance a sibling whom you trust to manage your assets and serve as parental figure to your child, this may not always be the case. In any case, the method of nominating and selecting these various fiduciaries are different. Guardians are often nominated by the parent in their will, subject to court appointment. A trustee is someone you select or designate outside of court, through the trust instrument.
Don’t Overlook Beneficiary Designations
One commonly overlooked aspect of an estate plan are the beneficiary designations.
Certain accounts are considered Transfer on Death (TOD) – life insurance policies, IRAs, annuities. Beneficiaries are designated by the account owner and the proceeds or the values of these go directly to the designated beneficiary upon the account owner’s death.
The obvious benefit is that these types of assets bypass probate. They go directly to the designated beneficiaries.
But as we have been discussing, having a child with special needs named as the beneficiary may not always be a good thing.
A family trust lawyer can help fix this discrepancy in your overall plan by coordinating these designations with the SNT. Effectively, proceeds from these accounts go towards the trust instead of directly to the beneficiary. That way, instead of the proceeds transferring directly to your child, they go to the protection of the trust.
Conclusion
Understanding what a Special Needs Trust is is only the first step. You also need to understand how it can work for your specific situation, and then how it can be coordinated with a comprehensive estate plan. That way, you ensure that you have planned as best as you can, and at the same time harmonizing all the moving pieces so that they do not cancel each other out. Contact us today if you would like to discuss how you can integrate an SNT into your estate plan.