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Planning for the Future...Part 1/
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By Harry S. Margolis and Eric Prichard
Supplemental needs trusts are one of the most
important parts of a parent’s estate plan
because they allow maximum flexibility to manage
a child’s care during every stage of her
development. Typically, when you think of
leaving an inheritance, you picture a dusty law
office, the opening of a cracked will, and bingo
- everyone gets their share. For parents of
children with special needs, however, it is
imperative that the share meant for the child
with a disability flow directly into a
supplemental needs trust in order to protect the
child’s benefits. A qualified attorney can
correctly set up your will to accomplish this.
Provided the trusts contain the appropriate
language, funds from a retirement plan or life
insurance policy, not just from a parent’s probate
estate, can flow directly into the trust when a
parent passes away, avoiding a potential loss of
benefits should the child receive the money
outright. Furthermore, trusts allow parents to make
their intentions and caregiving goals clear. While a
trustee must have independent discretion to
distribute the funds to or for the benefit of the
person with special needs, the trust can outline the
child’s needs, the parent’s wishes, and can even
include a special group of family friends and
relatives called trust advisors who consult with the
trustee on matters related to the beneficiary’s
care. In other words, trusts are incredibly flexible
and must be included in any responsible estate plan.
There are two main types of supplemental
needs trusts.
The first, called a third-party trust, can be set
up by any family member for the benefit of the
person with special needs. Funds contributed to this
trust are used to pay for additional care and
services for a beneficiary, and are not considered
the beneficiary’s assets for purposes of determining
eligibility for government benefits. Theoretically,
a parent or grandparent could deposit millions of
dollars into a third-party supplemental needs trust
and their child or grandchild would still qualify
for benefits if necessary (although in this case,
using the funds to provide superior private health
insurance or housing may be a better idea).
The second type of trust is called a first-party
or (d)(4)(A) trust. The key difference between a
first-party trust and a third-party trust is that
the former is designed to hold a beneficiary’s own
assets, not funds donated by others. Even though the
trust is designed to hold the beneficiary’s own
funds, due to a quirk in federal law, the trust must
be created by a parent, grandparent, or a court -
the beneficiary cannot do it. These trusts are
typically used when someone with special needs
receives a large accident settlement or inheritance
in her own name, or when someone who had been
healthy and working becomes disabled through an
injury or illness. While depositing funds into a
first-party trust will allow a person to qualify for
government benefits, the trust must provide that if
any money remains in the trust when the beneficiary
dies, it must first be used to reimburse the state
for Medicaid paid out on the beneficiary’s behalf.
If funds remain after such reimbursement, they can
then go to other family members. Because of
this provision, parents or other relatives of a
person with special needs should never leave money
directly to a beneficiary - they should establish
their own third-party trust to hold the funds,
avoiding the
payback provision.
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