A special needs trust can be established for the benefit of a minor or adult special needs child (or other family member) in either of two basic ways. One is to include the provisions to establish it as part of your living trust or will, to take effect upon your death. The other is to establish a “stand-alone” special needs trust which takes effect as soon you establish it.
There are several practical and important advantages to using a stand-alone special needs trust.
Making It Safer and Easier (Not to Mention Less Expensive) for Other Family Members to Benefit Your Special Needs Child. Other family members (grandparents, siblings, etc.) may want to benefit the special needs child. Including a special needs trust in their own estate plans would add complexity and expense. Making outright gifts or bequests to a special needs child can cause much more harm than good. It can cause a loss or interruption in eligibility for SSI and Medicaid benefits. If the special needs child is in a group home and Medicaid is covering the cost, that temporary ineligibility may put the child onto a waiting list for a bed.
On the other hand, if you establish a stand-alone special needs trust for your child, you make it very easy and inexpensive for other family members to provide for that child, and assures that they will do so “the right way.” All it takes is a letter from you to them that tells them that you have established a special needs trust for your child, and provides the name of the trust. Then all they need to do is to use the trust’s rather than the child’s name in their will, trust, insurance, IRA or retirement plan beneficiary designation, or even a check.
Making it easy for other family members to benefit your special needs child is a subtle and effective means of encouraging them to do so.
Making Your Own Beneficiary Designations Safer and Easier. If you establish a special needs trust in your living trust or will, you may be fooled into thinking that, in doing so, you have “taken care of things.” Often, that’s not the case.
Unless your insurance, IRA and retirement plan beneficiary designations name a special needs trust, those benefits would be paid directly to your special needs child and cause the problems described above. If you name a special needs trust to be established when you die under the terms of your living trust or will, you’re naming a trust that doesn’t yet exist and may never exist if your will or trust would be later changed or redone, or declared invalid when you die. It can also be difficult and cumbersome to try to describe a trust to be established when you die in the limited space provided on many beneficiary forms, and if the form asks for the name of the current trustee or the trust’s tax ID number, your only honest answer would have to be “there isn’t one yet.”
By contrast, it’s fairly simple to describe a stand-alone special needs trust on a beneficiary form, and doing so will assure not only that you got it right, but that you won’t have to change it if you later redo your estate plan.
Making It Easier to Assure That Your Special Needs Child Will Be Provided for in the Event of Your Lifetime Incapacity. If you become incapacitated and unable to handle your own financial affairs, someone else will have the responsibility of doing that for you. By law, a guardian or conservator appointed for you by a court (the outcome if you don’t have proper legal documents naming someone) can only spend your money for your personal benefit. Most power of attorney forms, and many living trusts, impose that same limitation. If you use your will or living trust to establish a special needs trust for your child upon your death, that won’t and can’t help yet, because you’re still alive.
The best way to legally assure that your special needs child can be properly provided for, from your assets, in the event you become incapacitated, is to have a stand-alone trust in place to receive the funds, and to have your financial power of attorney document (and living trust, if you have one) specify that, in the event of your incapacity, funds can be paid into that special needs trust for your child’s benefit.
Establishing a Stand-Alone Special Needs Trust Doesn’t Mean You Need to Fund It Right Away. Some people mistakenly believe that if you establish a stand-alone special needs trust for your child, that means that you need to immediately figure out how much of your estate you want to leave to that child, and put those assets into the trust right away. That would be a big problem, for several good reasons. First and foremost, you might need the money yourself. Next, the money you plan to leave your special needs child may becoming from future earnings or an inheritance from someone who is still alive. Finally, it’s pretty much impossible to say now how much you’ll be worth when you die.
Fortunately, that’s not the case. You can establish the trust now, and you (and others) can put assets into it at later times. Think of it like buying a safe. It will be there whenever you need it, and your decisions and the course of future events will determine when that will be.