When you become a parent, you truly begin to understand why estate planning is so important. If you are the parent of a child with special needs, you will undoubtedly feel a heightened sense of urgency when it comes to creating a comprehensive estate plan that will likely include a special needs trust. For those who are unfamiliar with these trusts, the Los Angeles special needs planning attorneys at Schomer Estate & Wealth Advisors help you understand special needs trusts.
Special Needs Trust Basics
Also referred to as a “supplemental” needs trust, a special needs trust is an irrevocable living trust that is specifically designed to protect assets intended for a beneficiary with special needs while simultaneously protecting the beneficiary’s eligibility for state and/or federal assistance programs. Which type of special needs trust you create will depend primarily on the source of the funding for the trust.
Why Might I Need a Special Needs Trust?
When children are minors, they cannot inherit directly from a parent. For this reason, a trust is often used to protect the inheritance of a minor child. Once the children reach the age of majority, however, most parents revise their estate plan so that assets are gifted directly to their children. As the parent of a child with special needs, gifting assets directly to your child at any age is often a bad idea because your child will likely depend, to some extent, on assistance programs (such as Medicaid and SSI) for his/her entire life. Eligibility for those programs, however, depends in part on an applicant’s income and assets. Assets gifted directly to your child will likely cause him/her to lose eligibility for these crucial assistance programs. A special needs trust is intended to resolve this dilemma by allowing you to gift assets to a special needs beneficiary without those assets counting against the beneficiary for purposes of eligibility for assistance programs.
Types of Special Needs Trusts
There are two types of special needs trusts. It is imperative that you understand how both work so you know which type you should establish.
- First-party special needs trust. Also referred to as a “self-settled” trust, a first-party special needs trust is established using the assets of the person with special needs. The beneficiary of the trust must be someone with special needs or who is disabled. The trust is established by a parent, grandparent, guardian of the person with special needs, or by a court; however, it is funded using assets owned by the beneficiary. This type of special needs trust is most frequently needed when someone with special needs (or a disabled individual) receives a lump sum of money. For example, if the individual received a settlement for injuries in a personal injury accident or received an inheritance. With a first-party trust, any assets remaining in the trust upon the death of the beneficiary must be used to pay back Medicaid (assuming the beneficiary was a Medicaid recipient). With a third-party special needs trust, there is no need to worry about repaying Medicaid.
- Third-party special needs trust. Not surprisingly, a third-party special needs trust is established by a third party with assets owned by the third party for the benefit of a person with special needs. This type of trust is most often established by a parent, or another family member, for the benefit of a child with special needs. A third-party special needs trust is funded using assets gifted by the parent, grandparent, or other family members. This type of trust must include specific language and must be worded such that the assets in the trust are distributed to a third party, such as the parent, to be used for the benefit of the individual with special needs. Because the assets held in the trust are not available to the beneficiary, those assets do not disqualify the beneficiary from eligibility for assistance programs such as Medicaid and SSI.
Contact Los Angeles Special Needs Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how to include a special needs trust into your estate plan, contact the experienced Los Angeles special needs planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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