Special Needs Trusts: How can I take care of a seriously handicapped child or grandchild in my estate plan?

Here’s an interesting estate planning problem, fortunately, one that faces only a few of us. Let’s say you have a grandchild with a serious mental or physical handicap. You have a “comfortable” sized estate (your children will probably get more than they deserve), and you would like to help your grandchild. Simple solution, right? Couldn’t you simply provide that a percentage of your estate is to be held in trust to provide support to the grandchild? The answer, as attorneys like to say, is yes and no.

The answer is “yes” if your estate is of a sufficient size that the amount you can allocate to the disabled grandchild is large enough to provide for his/her complete support, including housing, special education programs, medical care, etc., for the foreseeable future. The answer is usually “no” if you really don’t have that much to give. Here is the problem:

There are numerous state and federal assistance programs for handicapped persons, often referred to as “Medi-Cal” benefits (not to be confused with MediCare, a federal health insurance program for those age 65 or over). Most of these programs are based on the financial “need” of the person. If a handicapped person can pay his/her own way, a government-funded program probably cannot be provided. The usual scenario is that when the handicapped person reaches the age of majority, that is, 18 years of age, it is the handicapped person’s own, individual financial status that is examined to determine if he or she is qualified for a particular program. The financial status of parents, siblings, grandparents, etc., is normally not considered.  Because many seriously disabled persons are unable to earn a meaningful income on their own, they are able to participate in the various “needs-based” assistance programs.

If your grandchild is participating in such programs and if, all of a sudden, you leave him/her, say, $100,000, as a cash bequest or even a trust fund for “support,” the government program’s administrators will usually take the child out of the government-funded programs and require that the cash or the trust’s “support” share be used up before the child is re-qualified for public assistance. Consequently, the $100,000 you thought was going to “help” your grandchild will simply be used up to pay for the same programs the government agencies were paying for until the money is used up. The trustee of that trust fund will have little choice but to spend down the trust fund on those previously government-funded programs, to provide the “support” that your trust agreement requires. Then, when the money is used up, the grandchild can re-apply for the programs in which he/she was participating earlier, but by the time that occurs, your trust fund will no longer be there to help and, in fact, there may be damaging delays in re-qualifying for the programs. What to do?

The answer, in many cases, is a “special needs trust.” A special needs trust is one in which the trustee is instructed not to use the trust fund for support, education, medical expenses, etc., of the beneficiary, if there are available government programs that can provide for these needs. Instead, the trustee is instructed to use the trust for the “special” needs of the beneficiary, needs that have not and are not going to be met by the government programs. For example, the beneficiary might enjoy traveling with your family to Disneyland. It is not likely that a government program would pay for such an expense, but the trustee of the special needs trust can do so. Likewise, the trustee of a special needs trust could buy new clothes, a warmer coat, more comfortable furniture, a larger television set, perhaps even a new car, if appropriate, as long as the payments do not reach the point where they can be considered as “supporting” the beneficiary.

Then, after the death of the beneficiary, the trustee will be instructed to pay the remaining amount in the special needs trust to other beneficiaries, for example, the siblings of the beneficiary.

You should be aware that as this type of trust is more widely used, government agencies can be expected to challenge the restrictions on the purposes for which the trust can be used, arguing that if money is there for “special needs” and cannot, during the beneficiary’s lifetime, be used for anyone else, the money really belongs to the beneficiary and should therefor be applied against the cost of programs otherwise funded by the government agencies. It is critical, therefore, that a special needs trust be drafted carefully by a competent attorney with access to information regarding the eligibility requirements for the specific assistance programs of the beneficiary. The trust can contain other features that tend to make it difficult to challenge, for example, a provision adding other beneficiaries for whom the trust account can be used currently, or language that requires the trust to terminate if a government agency attempts to or succeeds in gaining access to the trust account.

Given this possibility, should you use a special needs trust? Maybe. Alternatives include giving a portion of your estate outright to the parents or siblings of the disabled person, with an informal and legally unenforceable “request” (but not an “instruction”) that they use such funds for the benefit of the handicapped person. In some families, this would work; in others, it would not. This author tends to favor the use of carefully drafted special needs trusts, especially with the “emergency” clause permitting distribution to others if the trust is successfully challenged in court, since, if the trust works, it will insure that the funds are available for the handicapped person, and if not, the family is no worse off than if you had simply given the money to someone else from the beginning.

In resolving issues of this sort, careful attention needs to be paid to the individual programs in which the beneficiary might be participating. If you are not sure whether needs-based programs are involved, it is certainly reasonable to ask the parents or siblings of the proposed beneficiary what programs are in effect and what are the requirements for those programs. You will then know what sort of damage you might cause by allocating a sum to the beneficiary. While we might have differing philosophies about the extent to which the government ought to be involved in our lives, if a government program is already helping someone who needs the help, we would be well-advised not to structure our estate plan in a manner that would temporarily disqualify a handicapped person from participation in the program.