Nearly 60 million Americans are living with a disability, 6.5 million of whom are children and young adults that will require the support of a caregiver throughout their lifetime. The unique issues that families with special needs face presents an opportunity for advisors to craft financial plans specifically tailored to the needs of the individual and their family. One way that advisors can help secure a family's finances to care for a person with special needs is by incorporating a Special Needs Trust (SNT) into their financial plan. However, two-thirds of special needs caregivers don't have an SNT in place or even know what one is.

Couple planning with calculator

SNTs can provide financial protection to individuals with disabilities by allowing funds to be set aside for their care without disqualifying them from receiving public assistance like Social Security and Medicare. SNTs are meant to fund benefits that improve an individual's quality of life; they are not allowed to provide for basic medical care otherwise covered through public assistance programs.

Permissible expenditures from an SNT include:

  • Medical services and equipment not covered by public benefits
  • Household costs and groceries other than food
  • Mortgage or rent
  • Rental property taxes
  • Utilities such as heating fuel, gas, electricity, water, sewer and garbage removal
  • One vehicle for transportation purposes, and any related auto maintenance
  • Laundry services and supplies
  • Over-the-counter medications

Solving a Common Conflict of Caregivers

SNTs were designed to protect individuals who are too wealthy to qualify for needs-based welfare programs like Social Security Income and Medicare. Under those programs, eligible individuals must have income and resources below a certain level to qualify for assistance, but the resource threshold varies by state. Regarding SNTs, "resources" include cash or any other personal property that an individual owns and could use for his or her support and maintenance. Legally speaking, if the individual has the right or authority to liquidate the property, his or her share is considered a resource. For caregivers who wish to provide a comfortable life for their dependent with special needs by transferring assets into their name or via inheritance, remaining under the resource threshold is a major concern.

If an individual initially qualifies for public benefit programs and then receives an inheritance or has assets transferred into their name, eligibility can be lost. Once eligibility is lost, the individual will only be able to requalify for benefits after exhausting their funds. To avoid this, families often try to understate their financial condition to qualify for benefits. The most common technique to meet Medicaid eligibility was transferring assets out of the individual with special needs' name. However, Congress imposed a look-back period of 60 months for the transfer of any assets after February 8, 2006, and effectively closed the loophole. Now, any assets transferred during the look-back period are considered resources, regardless of the transfer motive.

This conflict leaves families with special needs in a bad spot, forcing some families to consider disinheriting the dependent with disabilities or transferring assets to other adult children or third parties to care for the dependent. Not only is disinheritance emotionally difficult, but it is also risky because there is no legal duty to act according to the transferor's instructions. For these reasons, Congress carved out SNTs as a solution.

An Overview of the Types of Special Needs Trusts

The purpose of an SNT is to preserve assets for a child or individual with disabilities, but the type of trust your client needs will depend on their situation. SNTs fall into two general categories:

1) D4A "Payback" and D4C "Pooled" trusts are funded with the individual’s assets.

2) Third-party Special Needs Trusts are funded with a third party's assets.

If properly implemented, these trusts will not count among the individual's resources. While both types of trusts serve the same purpose, they have specific requirements and are not appropriate recommendations in every situation.

Payback Trust Requirements and Use Case

Payback Trusts are established for the sole benefit of an individual with special needs under the age of 65, by the individual's parent, grandparent, legal guardian or the court. The trust is funded with assets of the individual, usually an inheritance or lawsuit proceedings, and must include a Medicaid payback provision. The payback provision requires the trust to reimburse Medicaid for benefits paid during the beneficiary’s life at the time of their death.

To avoid having Payback Trusts viewed as resources, the trust should not direct distributions to be made for the support, health, or maintenance of the beneficiary. Include D4A Trusts in the estate of the grantor or beneficiary for estate-planning purposes.

Pooled Trust Requirements and Use Case

D4C Pooled Trusts provide a method for individuals who are disabled and over the age of 65 to place their assets into a trust without disqualifying them from receiving public benefits. For a Pooled Trust to be excluded as a resource, it must be established and managed by a nonprofit association. Much like mutual funds, D4C Trusts are comprised of individual beneficiary accounts that are pooled for investment and management purposes. Accounts within a Pooled Trust are established for the sole benefit of the individual with disabilities.

Like the Payback Trust, Pooled Trusts must also include Medicaid payback provisions. Upon the individual's death, any amount not retained by the nonprofit association must be paid back to the state. The individual cannot bequeath remaining assets in the trust to anyone; they must remain pooled for the benefit of the other trust participants.

Three advantages that Pooled Trusts have over Payback Trusts are:

  1. Lower administrative fees due to combined management and the trustee being a nonprofit organization
  2. Broader investment options
  3. Ease of execution because the trust is already established

One of the best times to recommend a Pooled Trust is when a modest corpus is involved; that way substantial assets are not lost to the state when the individual dies.

Third-Party Special Needs Trust Requirements and Use Case

Third-party SNTs are funded with the assets of a person other than the beneficiary. Third-party SNTs can be funded during the grantor's life or at their death by investments, retirement accounts, property, or life insurance. These trusts aren't counted as a resource if the beneficiary has no control over the trust distributions and no ability to revoke the trust. The main advantage of choosing a third-party trust over one that is funded by the assets of the individual with disabilities is that third-party trusts do not require Medicaid payback.

The beneficiary has only a lifetime interest in third-party SNTs. Trust corpus that remains at the time of the beneficiary's death passes to remaining beneficiaries selected by the donor or testator.

A study conducted by Greenwald & Associates on behalf of The American College of Financial Services MassMutual Center for Special Needs found that just 23 percent of special needs caregivers have a formal financial plan to help them navigate their tremendous financial responsibilities, and of those 63 percent don’t work with a financial services professional in any way. The study also identified affordability as the number one reason that caregivers and special needs households haven't established an SNT.

Families with special needs are in great need of competent, skilled, and compassionate financial advisors to help guide them through the complexities of securing a stable financial future for their family member with disabilities. There are affordable methods of implementing and funding SNTs for families in need, one being through life insurance. Read more about Special Needs Trusts and how to fund them with life insurance next week.

One way to differentiate yourself from the competition and confidently manage the unique needs of special needs households is by earning an advanced financial designation like the Chartered Special Needs Consultant® (ChSNC®).  It’s the only credential on the market of its kind. Learn more about the ChSNC® from The American College of Financial Services or download our guide, 6 Ways an Advanced Financial Designation Helps Grow Your Practiceto learn about other designations financial services professionals are pursuing to strengthen their potential for career success.

Want to grow your practice? Take the first step with a financial advisor designation. Download your guide.

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