If you are the parent of a child with special needs, you need to address your child’s needs in your estate plan to ensure that he or she is well protected both during your lifetime and after you are gone. Care must be taken, however, to ensure that your child will benefit from the financial assistance you intend to gift to him/her. To help you get started, let’s see how you can provide for your special needs child in your estate plan.
Why Is a Special Needs Trust Necessary?
As the parent, or loved one, of a child with special needs, special care must be taken when estate planning because gifting assets directly to your child or loved one could do more harm than good. Adults with special needs often depend on state and federal assistance programs such as Medicaid, Medicare, or SSI. Those programs, however, typically have income and asset limits that cannot be exceeded by recipients. Gifting assets to someone with special needs, therefore, can result in disqualification for many of these much-needed programs. The solution is often found in the creation of a special needs trust.
Third Party Special Needs Trust
As the name implies, a third-party special needs trust is established by the third party with assets of the third party for the benefit of a person with special needs. This type of trust is most often established by a parent, or other family member, for the benefit of a child with special needs and uses assets of the parent, grandparent or family member. This type of trust must include specific language and must be worded such that the assets in the trust are actually distributed to a third party, such as the parent, to be used for the benefit of the individual with special needs. Because the assets held in the trust are not available to the beneficiary, those assets do not disqualify the beneficiary from eligibility for assistance programs such as Medicaid and SSI. In fact, the idea behind this type o special needs trust, which is also referred to as a “supplemental needs” trust, is that the assets held in the trust will be used to “supplement” the benefits provided by the state and federal government.
First Party Special Needs Trust
The other common type of special needs trust is a first party, or self-settled, special needs trust. This type of special needs trust is established using assets of the person with special needs. It must be established by the parent, grandparent, guardian of the person with special needs, or by a court. Only the person with special needs can be the beneficiary of the trust. This type of special needs trust is most frequently needed when a disabled individual receives a lump sum of money, such as the result of a settlement for injuries in a personal injury accident. The lump sum would likely disqualify the beneficiary from eligibility for assistance from Medicaid (called Medi-Cal in California), SSI, and other state and federal assistance programs. One of the other important differences between a third part and a first party special needs trust is that with a first party trust, any assets remaining in the trust upon the death of the beneficiary must be used to pay back Medi-Cal. With a third-party special needs trust there is no need to worry about repaying Medi-Cal.
Please download our FREE estate planning checklist. If you have additional questions or concerns about planning for your child with special needs, contact us at the Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.
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