Creating a Special Needs Estate Plan that Works: Part 2 of 3

For all the information below, please note: everyone’s estate plan, and special needs plan is unique and needs to reflect their financial and family situation. Additionally, terminology varies state by state. The information below is reflective of the most commonly used definitions. Even with variations, these concepts largely hold true, even when a different name is used in your state of residence. “A rose by any other name would smell as sweet.” Still, it is always recommended to speak with an attorney licensed to practice in your state, that has special needs expertise. Looking for lawyers who belong to the Special Needs Alliance, Academy of Special Needs Planners, Life Care Planning Law Firms Association, or hold the CELA designation is a great place to start.

Step 1  :  Choose the Right Trust Type: 1st party (Special Needs Trust) v. 3rd party (Supplemental Needs Trust)

If your loved one has a settlement, or acquired their disability later in life, they will likely need a 1st party trust to protect their assets and ensure that they still qualify for government benefits, such as Medicaid. Frequently, these trusts are created with court supervision, so you likely know if you have a 1st party trust, or if one is needed.

In some cases, an individual with a disability builds up assets in their name, and the need for a 1st party trust arises outside of the settlement context. An individual with (in most cases) more than $2,000 of assets in their name is ineligible for Medicaid, but moving those assets into a 1st party SNT (Special Needs Trust) can restore program eligibility, after a lookback period.

Key Takeaway: Even if you have a 1st party SNT, you may still need a 3rd party SNT. These two trusts address different problems, and many beneficiaries have both types of trusts.

A 3rd party Supplemental Needs Trust (SNT) holds money that was never in the disabled individual’s name. Often, this is money that was inherited from parents or grandparents. If your loved one will inherit more than $2,000, you probably need a Supplemental Needs Trust.

The biggest difference between 1st and 3rd party SNTs is how the trusts work with Medicaid.

Medicaid payback: 1st party trusts are subject to a Medicaid payback lien. This means that upon the demise of the beneficiary (the disabled individual), before any money is distributed to remainder persons, often siblings or the children of the beneficiary, any money that Medicaid has paid out gets repaid first, with interest. Often the payback amount is greater than the trust assets, eliminating any further distribution. Don’t worry though, the excess Medicaid lien does not pass as debt to anyone else – it just bills against the trust balance to whatever extent funds are available.

3rd party trusts are not subject to a Medicaid lien, so excess assets can be distributed to the persons or organizations that you designate as remainder persons.

Another note on Medicaid liens: Since Medicaid is waiting to be paid back for their expenditures out of the funds in the SNT, Medicaid will monitor expenditures from a 1st party trust closely to ensure funds are being preserved for their eventual payback. Accountings, oversight, and strict adherence to the Social Security Administration POMS (Program Operations Manual System) is required.

The Medicaid payback and oversight of 1st party trusts are the primary reasons that families strategize to place as much money into a 3rd party trust as possible, while spending down the 1st party trust, if one exists.

Absent proper planning, such as the creation of a 3rd party SNT, courts may create a 1st party SNT to protect a disabled individual’s benefits that would be lost. For instance, in the case of an accident or medical malpractice, where there is a settlement or money inherited from parents who didn’t have an estate plan, money would go into the disabled person’s name, barring them from qualifying for benefits (or would kick them off existing benefits). Courts often step in and create 1st party SNTs to protect this from happening – if/when they are alerted. Sometimes, no one lets them know, then it’s a very arduous clean up process that doesn’t always work out well.

While creating the 1st party SNT provides protection for the beneficiary, so that they don’t lose benefits, the lack of planning unnecessarily gives Medicaid oversight of trust expenditures, and results in a payback lien – not to mention the substantial legal fees involved in creating a trust via judicial intervention. Creating an SNT now avoids these legal fees and can eliminate the complexities that come with a 1st party trust.

Key Takeaway: You almost always need a 3rd party SNT if your loved one is receiving or will receive benefits, or would benefit from the financial guidance and protections of a supplemental needs trust. You only need a 1st party SNT if your loved one receives or intends to receive government benefits and has assets of their own. These two types of trusts can work together, and one does not replace the other. 

Step 2  :  Choose the Right Trust Form: Standalone v. Testamentary/Sub-Trusts (3rd Party)

Some lawyers choose to create a supplemental needs trust within a will (testamentary) or another seperate trust document (sub-trust). This can save clients money when drafting documents, and in some situations may be a cost-efficient solution for creating a supplemental needs trust. Often, however, this can lead to complications when it comes to administration, or inheritances and gifts from other family members. Here are a few such challenges:

1. When an SNT is created in a will, or as part of another trust, that trust doesn’t exist until it is triggered, e.g., when someone dies and the trust is created as a part of the will. While this may cover the primary need of the trust, it raises a few issues that families frequently encounter. The first is the unplanned gift or inheritance from another family member. As an example, grandma passes away and leaves each of her grandchildren $25,000. This money cannot go into a trust in mom and dad’s wills, because while they are alive, that trust doesn’t exist.
2. When a trust is used to pay for certain expenses, or applications are made for various government services, often the trust needs to be produced, in its entirety. This means that in a trust created under a will, the will must be shared, or the terms of a living trust in the case of a sub-trust. Many families feel this is an unnecessary violation of their privacy.
3. Trusts created under wills/sub-trusts need time upon the grantor’s (parent’s) demise to be set up, accounts need to be opened, tax ID numbers need to be established, and more. In some cases, trustees find out for the first time, that they have been appointed and need to get up to speed before they can begin to fulfill their obligations. If there are probate issues, additional delays can arise. During this set-up time, which can be lengthy, beneficiaries are left waiting.
4. Sometimes the need arises to fund the trust before a grantor’s (parent’s) demise. This could be to “try out” the trustee, or for the convenience of an aging parent, who wants to offload some responsibility, or where relations between beneficiary and parents are tenuous, or, most commonly, because a parent is losing capacity themselves and need to create a mechanism to support their loved one. A trust setup under a will does not exist until the death of the parent, so it cannot be used in any of these situations.
5. Lastly, and this is a more practical than legal concern, SNTs within other trusts or wills are usually short, for the sake of efficiency and readability. Sometimes this is sufficient, but frequently parents want a robust trust that accounts for the myriad of challenges and situations that may arise. Additional protections for the beneficiary, guidance for the trustee, powers of the trustee, and successors, the various trust roles are all incorporated into larger trusts. SNTs that address these concerns can be 20 - 40 pages, or more. A document of that length is a nightmare to try to integrate into other documents, but short documents often lack critical details and protections.

The solution: A stand-alone supplemental needs trust. This option may cost a few dollars more when creating your plan but solves every one of the above issues, and can save money in the long term. A common misconception is that by drafting a standalone trust, it needs to be funded now – this is not the case. Some attorneys like to staple $20 to the back of the trust to show that it has been established, but that is the extent of the funding requirement. You do not need to start filing tax returns, or any of the other administrative tasks that come with trust administration. Other than paying a small amount more of money on upfront legal expenses, the standalone trust option has no drawbacks, and the downsides of the testamentary trusts can be meaningful. 

Step 3  :  Identify the Right Trustees: Trustees, Co-Trustees & Successor Trustees

For both 1st and 3rd party SNTs, the first role to consider is who will serve as trustee. Trustees are responsible for all decisions made relating to the trust. They can manage the trust assets (the money) themselves or hire an investment manager. They also make all distribution decisions, such as what type of housing, food, services, support, and equipment will be paid for by the trust, since special needs trusts are required to place all discretion with the trustee. The Trustee files taxes for the trust, does annual accountings, reports to the court where needed, and may need to interact with the Medicaid office to ensure compliance.

Co-trustees are additional trustees serving at the same time and have all the above responsibilities. Mom and Dad can be co-trustees, or two siblings, and occasionally a professional trustee and a family member. Critically, co-trustees are liable for each other’s actions, since they have both taken on a fiduciary role, which includes reviewing each other’s actions. Assume two siblings are co-trustees: If sibling 1 makes a mistake or acts improperly, sibling 2 can also be found liable, as it was their duty to monitor and prevent such activity. For this reason, most professional trustees will not serve as co-trustee with a family member.

Successor Trustees are future trustees. They are on deck, waiting to serve, until such time as the currently serving trustee is no longer able or willing to serve, generally due to death or incapacity. Frequently you will see Mom and Dad as trustee, and upon their death, incapacity or resignation, a bank, trust company, or child appointed as successor. Also note, you can have multiple levels of successor trustees. This is particularly helpful when there are age disparities between the beneficiary and the trustee. For a younger beneficiary, for example, they may not have a peer who is currently able to serve, so you could select an uncle or aunt as first level successor, then the child’s sibling as second level successor trustee.

Key Takeaway: Practically speaking, unless there are tax planning considerations, or a unique family dynamic, the most common scenario with a 3rd party trust is to see Mom and Dad as initial co-trustees, then, upon their resignation or demise, a successor trustee. The successor trustee can be a professional, like a trust company, or an individual, like a sibling.

Individual v. Professional Trustees: When selecting trustees, the first question families face is whether they want a family member or a professional in the role. Most of the time, a family’s first instinct is to appoint a sibling, but after further consideration, many select a professional trustee. If you are considering appointing a friend or family member as trustee (or successor trustee), consider if the person you have in mind meets ALL the below requirements:

• Is a contemporary of your child (age wise) and will be available to serve throughout your child’s lifetime;
• Understands government benefits;
• Understands investment management;
• Can make appropriate distributions proportionate to the trust’s assets, beneficiary’s expected changes in cost of care, and the beneficiary’s life expectancy;
• Will be responsive to your child’s needs;
• Is willing and able to interact with Medicaid and government offices;
• Will file accountings, tax returns, and perform other administrative tasks;
• Knows how to protect government benefits and what distributions are permissible;
• Can maximize the impact of the money you’ve set aside to improve your child’s life;
• Is willing to serve and is open to a lifelong commitment;
• Will assume the risk of being a fiduciary;
• Do you trust this person now and in the future to put your child’s interests ahead of their own (be a fiduciary)?

If you have someone who meets all the above criteria, congratulations, you’ve found good candidate to serve as trustee! If not, consider a professional trustee.

Even if all the above criteria are fulfilled there are a few additional considerations:

• Families often find that a professional trustee, as a neutral party, makes planning easier. Rather than trying to decide if mom’s sister or dad’s brother should be trustee, a professional causes no conflict. Similarly for divorced families, selecting a corporate trustee can make collaboration on trust planning possible.
• One of the most important reasons families opt for a professional trustee is to protect their family dynamic. Placing one sibling, or family member, in charge of another can cause a lot of conflict. Sibling 1 telling Sibling 2 that they cannot buy something they want, or spend money as they choose, even if they are correct and being prudent, can be very disruptive to family relations. Since most trustees assume the job after mom and dad have passed, these conflicts arise during a grieving and adjustment period, when tensions are high, and when the beneficiary is most in need of support. Now, their sibling or family member, who they need emotional support from, also feels like a case manager or accountant. This rarely works out well. 
• What happens when a mistake is made by that family member that triggers a loss in benefits? Professionals rarely make such mistakes, but when they do, they get sued, funds are often recovered, and the beneficiary (the trust) is made whole. What happens when Sibling or Uncle are trustee? Do we want to put the beneficiary in the position of suing family members to recover trust funds? Non-professional trustees (individuals) frequently run afoul of government benefits regulations, so this is a topic that should be thoroughly considered when thinking about the right type of trustee.

The two most frequent objections that arise to profession trustees are: “Professionals are going to be expensive,” and “Professionals won’t know/understand/love my child.”

First, as to cost: Assume a trust is set up for $250,000, funded upon your demise. If you appoint a family member, unless they have financial expertise, the first thing an individual would do who is a prudent trustee, is hire an investment manager. Most of the time fees for investment managers are 0.80% to 1.00%. ($2,000-2,500/year) So, when looking at the cost of a professional, consider that in most cases, investment management fees are a given either way. Professional trustees, like Hope Trust, can charge as little as 1.10% on a $250,000 trust – and even less for larger trusts. In this example, the cost difference could be as little as $250/year. For just 63 cents per day, no family member or friend is being put out or assuming a fiduciary liability (yes, that’s a Sally Struthers reference).

The second objection: “But how will a professional understand my loved one, and will they be there for them like family would?” Firstly, a good professional trustee would immediately get a care plan in place for your loved one so they know everything about their medical, legal, social and financial needs. Even better, if parents create and maintain a care plan during their lifetimes, they can ensure a seamless transition to the professional. Interview professionals and find one you like and feel comfortable with. Ask about how they handle care management, do they have social workers, nurses, psychologists on staff to help support your loved one. If the answer is yes, your child will have a level of support that family would be hard pressed to provide. Moreover, unlike family, professionals don’t have other obligations like work, family, illness, or death, that will prevent them from serving your loved ones needs. The professional trustees, like Hope Trust, are under a fiduciary obligation to be there and be responsive throughout the lifetime of the trust.

Don’t worry, a professional trustee doesn’t cut your family out of the mix. There is still plenty for willing family members to do, and, if you choose, your family can still have oversight of the trust, without any of the daily work or risk. Where appropriate, consider roles like trust protectors for family members (to be discussed in detail in another article). Also consider family members for roles like health care proxy, power of attorney, guardian, conservator, or as executor of your will.

The role of trustee requires a deep understanding of financial, legal, and regulatory requirements, as well as a comprehensive understanding of the beneficiaries needs. The best trustee will ensure all available supports and resources are provided to your child, will check-in and make sure that they are thriving, and that the trust is being used wisely. Frequently, trustees interact and collaborate with siblings or family members, when they serve in the role of trust protector, guardian, or conservator. This is how the “love” is delivered, collaboratively, with the right people and professionals in the right roles.

The two most frequent objections that arise to professional trustees are: “Professionals are going to be expensive,” and “Professionals won’t know/understand/love my child.”

First, as to cost: Assume a trust is set up for $250,000, funded upon your demise. If you appoint a family member, unless they have financial expertise, the first thing an individual would do as a prudent trustee, is hire an investment manager. Most of the time, fees for investment managers are 0.80% to 1.00% ($2,000-2,500/year). So, when looking at the cost of a professional, consider that in most cases, investment management fees are a given either way. Professional trustees, like Hope Trust, can charge as little as 1.10% on a $250,000 trust – and even less for larger trusts. In this example, the cost difference could be as little as $250/year. For just 63 cents per day, no family member or friend is being put out or assuming a fiduciary liability (yes, that’s a Sally Struthers reference).

The second objection: “But how will a professional understand my loved one, and will they be there for them like family would?” Firstly, a good professional trustee will immediately get a care plan in place for your loved one so they know everything about their medical, legal, social, and financial needs. Even better, if parents create and maintain a care plan during their lifetimes, they can ensure a seamless transition to the professional. Interview professionals and find one you like and feel comfortable with. Ask about how they handle care management, do they have social workers, nurses, psychologists on staff to help support your loved one. If the answer is yes, your child will have a level of support that family would be hard pressed to provide. Moreover, unlike family, professionals don’t have other obligations like work, family, illness, or death, that will prevent them from serving your loved one’s needs. The professional trustees, like Hope Trust, are under a fiduciary obligation to be there and be responsive throughout the lifetime of the trust.

Don’t worry, a professional trustee doesn’t cut your family out of the mix. There is still plenty for willing family members to do, and, if you choose, your family can still have oversight of the trust, without any of the daily work or risk. Where appropriate, consider roles like trust protectors for family members (to be discussed in detail in another article). Also consider family members for roles like healthcare proxy, power of attorney, guardian, conservator, or as executor of your will.

The role of trustee requires a deep understanding of financial, legal, and regulatory requirements, as well as a comprehensive understanding of the beneficiaries needs. The best trustee will ensure all available supports and resources are provided to your child, will check-in and make sure that they are thriving, and that the trust is being used wisely. Frequently, trustees interact and collaborate with siblings or family members, when they serve in the role of trust protector, guardian, or conservator. This is how the “love” is delivered, collaboratively, with the right people and professionals in the right roles.

Ultimately, you, the creator of the trust (grantor), will decide the right type of trust, form of trust, and the appropriate trustees. The below check list may help in that analysis, and of course, reaching out to a professional to aid you in your planning is always a good dea!

Trust Type: 1st, 3rd, or Both
My loved one has, or will have, assets of their own (in their name) in excess of $2,000:
Consider: 1st Party Trust

My loved one will be inheriting money from me or others:
Consider: 3rd Party Trust

Both of the above are true:
Consider: Both trust types

Standalone v. Testamentary
My loved one may inherit money before I/we pass away (e.g., from grandparents) or
Consider: Standalone Trust

I/we do not want to disclose additional information to government agencies, financial institutions, or care providers, or I/we would like to be able to fund the trust before my/our demise, or I/we would like a more comprehensive trust with terms that are tailored to our family’s situation

None of the above apply to my family:

Consider: Testamentary Trust
 
Initial Trustee Selection
My assets are below the federal estate tax limits (currently ~ 12MM for an individual or ~24MM for a couple, though this is changing), and All of 4 of these are true: Parents as initial trustee

My assets are below the state estate tax limits (varies by state), and I do not live in a state with an inheritance tax, or my intended beneficiary would not trigger the inheritance tax (e.g., beneficiary is your child), and There is nothing in my family dynamic that would cause conflict with parents serving as trustee:

Any one of the above is false:

Consider: Professional Trustee
  
Successor Trustee Selection
There is an individual who has all the identified skills, is willing to serve, understands the workload and risks, and is an age-appropriate trustee for my loved one:
Consider: Individual Trustee

Our family dynamic would be negatively impacted by putting one sibling, or family member, in charge of another, or

I do not have someone who meets all the criteria, do not want to burden that person, or ask them to assume fiduciary risks or obligations:

Consider: Professional Trustee 

The best time to start planning for your loved one is now. A holistic team of professionals, including lawyers, financial advisors, benefits experts, and care/support coordinators will ensure that your loved one is supported throughout your lifetime and beyond. 

ABOUT THE AUTHOR:

Joshua Fishkind, J.D., MBA is the CEO and a co-founder of Hope Trust, a full-service care planning company dedicated to helping families plan for their loved one with special needs, provide daily care management and support, and administer special needs trusts. 

Read the article here.