Special Needs Trusts Q & A

by Christina Medvescek

A special needs trust is a way to ensure the financial future of a child with a disability. For more detailed information on special needs trusts (SNTs), see “Fear, Dread and Loathing: Figuring Out Special Needs Trusts” in Quest 13-6.

(NOTE: Although most children will be adults when they benefit from an SNT, the term “child” is used in this article because it describes the relationship with the parents.)

Q: Where does the money in the SNT come from?

A: Money can come from several sources.

Often, a trust is empty until the parents die, and then money is put into the trust from the parents’ life insurance and estate.

Grandparents or other relatives also can leave money to the trust in their wills, living trusts and life insurance policies.

Or, a parent/grandparent who needs to “spend down” assets in order to qualify for Medicaid benefits can do so by transferring assets to the special needs trust without penalty. The law makes a special exception for asset transfers of this kind; make sure you use an experienced attorney. For referrals, see the Special Needs Alliance.

If parents are financially able to do so, they can use their child’s Supplemental Security Income (SSI) payment to fund the trust. If the child receives SSI and pays room and board at the parents’ home, parents may receive the funds as rent, and then deposit some or all of that payment in the SNT.

“In this way, you’re using the government to fund the SNT,” says Stephen Dale, a California attorney who is a member of the Special Needs Alliance, a national network of lawyers dedicated to disability and public benefits law.

Q: How much money should be in a special needs trust?

A: Special needs calculators, such as one from Merrill Lynch and special needs financial planning information such as is available from MetLife and Merrill Lynch allow parents to estimate the sum required to ensure that their child has the desired standard of living (barring any changes in governmental benefits or programs).

Once they have a target number, parents can purchase life insurance policies in this amount. Some parents buy a less expensive survivorship or second-to-die policy, which basically is insurance on both parents at once. The policy doesn’t pay off until both parents have died.

Q: What if we don’t have any relatives willing or able to serve as a family trustee?

A: There are many options for trustees. These include corporate trustees, private professional trustees, and a promising, emerging option called pooled master trusts.

Corporate Trustees, such as banks, usually require a minimum of $300,000 or more in the special needs trust in order to provide management.

Private Professional Trustees, or private fiduciaries, generally have no minimum SNT requirement and charge by the hour, says Dale. Look for a fiduciary who belongs to a professional association. For more information, contact the National Guardianship Association.

Pooled Master Trusts are available in some states for those with a modest amount of funds or no ready trustees. Run by nonprofit agencies, a pooled trust is a cross between a 401(k) retirement account and a special needs trust. Individuals don’t set up their own SNTs, but rather get an account in a pooled SNT consisting of many small accounts.

By combining small accounts, pooled trusts can maximize investment income and minimize costs. The pooled trust also handles all administrative tasks, as well as oversight of the child’s welfare and purchases, and charges a very minimal annual fee.

Although pooled trusts are a good idea that’s constantly improving, at present there are several downsides. They’re not available in all states. Some only serve people with certain disabilities or of a certain age. Some are poorly managed and go broke.

With pooled trusts, it may take a while for the child’s bills to get paid. It may not be possible to remove the funds if you’re not happy with the trust. Some trusts require that, when the child dies, any money remaining in the account be given to the pooled trust.

However, there are a growing number of well-run pooled master trusts set up by established agencies, such as The Arc (which accepts people with all disabilities). The Arc’s “Pooled Trust Programs for People with Disabilities” can be downloaded. Contact your local chapter for information about pooled trusts in your state.

One safeguard is to set up a special needs trust for your child, then have the SNT managed by the pooled trust. This way the funds can be removed and transferred elsewhere if the trust proves unreliable, Dale says.

Dale recommends consulting with a special needs trust attorney, financial planner and/or a benefits counselor at your local independent living center before committing to a pooled trust.

Q: Is there any free planning I can do for my child’s future?

A: Although not an alternative to financial planning, a letter of intent (sometimes called an ethical will) can help clarify objectives and instructions for your child.

A letter of intent isn’t a legally binding document, but the courts and others may rely on it for guidance if you’re no longer able to care for your child due to death or illness. It’s a way to inform future caregivers and decisions-makers of your hopes, wishes and desires concerning your child’s care.

However, a letter of intent isn’t a substitute for an SNT, Dale advises.

According to the National Information Center for Children and Youth with Disabilities (NICHCY), a letter of intent should outline your intentions in seven key areas: housing/residential care, education, employment, medical history and care, behavior management, social environment and religious environment.

A detailed worksheet for writing a letter of intent can be found at the end of a NICHCY News Digest about financial planning.

No special legal language is required -– not even proper grammar and spelling. The letter can be typed or handwritten. As much as possible, involve your child in the writing of the letter, so that together you can consider various options and his or her wishes can be made clear.

Q: Should I leave my house to an SNT, to ensure my child always has a residence?

A: In some circumstances, it’s OK to leave a house directly to your child rather than to an SNT. A person receiving SSI and Medicaid can own a residence of any value without affecting benefits, says Dale.

But if your child could never manage being a homeowner, or might need to move from the house at some future point, then leaving the house to a special needs trust may be a better alternative.

If the child owns the house and sells it, the proceeds from the sale will cause ineligibility for benefits. But if the home is in an SNT and needs to be sold or rented, benefits won’t be affected.