Caring for Special Needs: Incorporating Special Needs Trusts in Your Estate Plan

[00:00:00] Atty. James Jones: Welcome to Legacy Talk. I’m your host, James Jones. I’m an estate planning attorney from Tacoma, Washington. I’ve been practicing for over 20 years, and my main practice areas include estate planning, probate, and estate administration. On Legacy Talk, we discuss topics surrounding families and estates.

[00:00:19] Estate planning is often a confusing and complicated topic, but my goal with this podcast is to make it accessible and understandable to those who need it. So if this is something that interests you, I’d appreciate it if you’d click the subscribe button and like this episode so that you can follow along as we break down the barriers to estate planning.

[00:00:40] I’m excited to get to today’s topic. Today’s topic is Caring For Special Needs, Incorporating Special Needs Trusts In Your Estate Plan, because knowing the options and strategies to provide for special needs beneficiaries in your estate plan is critical. So on today’s [00:01:00] show, we’re talking about caring for special needs, incorporating special needs trusts in your estate plan.

[00:01:06] So let’s get to it.

[00:01:07] Planning for special needs individuals is a misunderstood, a very misunderstood aspect of estate planning. You’d be surprised to hear how many people that I meet with and clients that I meet with. Who oftentimes have a special needs individual in their family, often a child, that don’t or have never heard of a special needs trust.

[00:01:26] They don’t know what to do with their special needs child, there’s uncertainties around every corner. I don’t want Johnny to lose his benefits when I die, he can’t have any money or he won’t qualify. Oftentimes the common thought is to disinherit special needs beneficiaries in estate plans, that way they’re sure to keep their benefits, and that’s true. Disinheriting someone, making sure they get no money, is a way for them to maintain benefits. But is that the best way?

[00:01:55] The other common thing that people do is to say, well, we’ll just [00:02:00] inherit him and we’ll just put it on the other kids, the other kids will take care of Johnny when they can, they’ll help him out when they can. Or an even more common approach would be, I’m going to give the money to Sally, our most trusted daughter, and she’s going to get Johnny’s share and we’re going to give it to her with the understanding, of course with no structure, that Sally is going to use this extra money for Johnny, for his benefit. But such planning, or lack thereof, is hopeful at best and catastrophic at worst.

[00:02:31] So, today we’re going to discuss the uses and benefits of special needs trusts in your estate plan.

[00:02:39] So to start off, we’re going to be talking about some basics with regard to special needs trust. What are they? How do we use them? Why do we want to use them? All those kinds of things.

[00:02:49] I’ve got probably 10 things to present to you on today’s episode with regard to the benefits of a special needs trust in your estate plan. But I thought that [00:03:00] while we get started on this episode that we’d have to talk about, well, what is a special needs trust James? What is the special needs trust?

[00:03:08] And so to start off, what is a special needs trust? Okay, we’re getting to it. Am I teasing it enough? What is a special needs trust James? Could you tell us? Are you on the edge of your seat yet? Maybe.

[00:03:17] A special needs trust is a trust that’s designed to allow a person to receive or maintain government benefits or still qualify for government benefits if they receive money through an inheritance or personal injury case or something like that.

[00:03:35] Special needs trusts, often sometimes called a supplemental needs trust, depending on where you are from, are different from other kinds of trusts. We talk a lot about revocable trusts, we’ll mention an irrevocable trust, a special needs trust is an irrevocable trust, a type of irrevocable trust.

[00:03:50] We talk about trust for beneficiaries inheritance column, sometimes we’ll call them dynasty trusts, right? That protects from creditors and it makes sure that there’s some guidelines maybe for the [00:04:00] beneficiary and protect some money from being lost in car accidents and divorces.

[00:04:04] And then there’s a special needs trust. A special needs trust is different than those dynasty trusts that you’re going to set up for a typical beneficiary of yours or a child of yours. Basically considers maintenance, education, support, and health as things that could be used for with the money. Okay?

[00:04:19] They can use the money for maintenance, education, support, and health. With a special needs trust, it’s fully discretionary. The trustee who’s appointed to manage the trust has full discretion as to how those assets will be used for the beneficiary.

[00:04:34] And they’re charged with the duty to make sure that the things that they use those funds for do not disqualify the beneficiary from benefits. And in certain cases, they’re charged with helping that individual if they qualify for benefits to get those benefits. And they’re also charged with giving them money in a way that makes it so that these benefit entities or institutions like social security or Medicaid [00:05:00] or something like that, don’t say, Hey, it looks like you gave Johnny some money for rent. We want some of that money back. We’re going to reduce his benefits because he’s getting the rent paid by somebody else.

[00:05:09] So, that’s something that the trustee really has to look at and so they’ve got that discretion to make sure that they’re managing that trust for the benefit of the beneficiary. Oftentimes we’re calling him Johnny in today’s episode, if you may have noticed. For Johnny’s benefits, we want to make sure that Johnny maintains those benefits. Okay?

[00:05:27] So, number two thing that a special needs trust does is to preserve those governmental benefits. And we’re talking about things like social security disability, we’re talking about things like Medicaid for health insurance. And we want to make sure that if there’s a beneficiary say, for example, we’re using Johnny as an example is, you know, he has special needs of some kind, he’s autistic, maybe that’s a very common disability where we want to make sure the beneficiary is taken care of.

[00:05:57] You might not have a very productive job if [00:06:00] he’s got severe autism, a lot of the time, autistic folks are fully functional, but I’m talking about a severely disabled individual who’s unable to manage their affairs, unable to work a regular job. That’s kind of what we’re talking about here.

[00:06:15] So this person, Johnny potentially has the need for supplemental income from social security, you might qualify for disability income because he is not able to earn a regular living. Right?

[00:06:27] He’s also oftentimes entitled to certain programs for training and therapies and things like that through the governmental entities. And he’s also probably qualified for Medicaid, which is government health insurance for people that don’t have money or that people that don’t have the ability to make money, like this example of Johnny.

[00:06:45] And so, the special needs trust is drafted in a way to provide benefit to Johnny while allowing Johnny to maintain benefits. And so, we’ll get to how these are funded in a minute, but if [00:07:00] Johnny receives money from a third party or through inheritance or through something and it’s not properly sheltered in a special needs trust. He could lose those benefits, right? Until those funds are spent down.

[00:07:11] So, you’d have to spend everything last down to the last cent in order to get benefits, particularly Medicaid benefits and social security disability, cause there’s asset requirements.

[00:07:20] So, the purpose of the special needs trust is really to supplement. We’re going to maintain and preserve benefits. That’s number two reason, right?

[00:07:27] But the number three benefit of a special needs trust or thing to know about a special needs trust is, that they supplement government care, right?

[00:07:37] They enhance the quality of life of a beneficiary and I thought, well, what are some examples of this, right? Governmental programs exist for insurance, for income, like we’ve talked about also for rent, right? There’s also programs where they’ll help people with low incomes for rent that they might not otherwise qualify for if they have too much money.

[00:07:58] So special needs [00:08:00] trust often in a trust agreement will define special needs as medical and dental expenses, clothing, equipment, training programs, education, treatment, residential care, transportation, specific dietary needs, but also things like spending money for buying gifts, right? Audiovisual equipment like televisions or what do we have now, mp3 players?

[00:08:28] I don’t know, records are coming back, right? Maybe he wants an LP, maybe Johnny wants a LP and he wants a record player. Apple music, right? We don’t pay for music anymore, but I digress again, things for entertainment purposes, vacations, going to the movies.

[00:08:43] Maybe Johnny really likes movies, maybe he likes to go to music, maybe that helps him feel good, right? Helps him get in the moment, feeling that live music coursing through his body. Trips, vacations.

[00:08:54] So, those things are things that are like supplemental to things that government’s going to cover, [00:09:00] right? But the trustee is under no obligation to provide for things as if they are going to cause a problem for Johnny down the road, right? Or if they’re going to say, well, Hey trustee, you gave Johnny this money and that money that we give him for social security income should have covered and we want that money back. So we don’t want to do that, right?

[00:09:21] We don’t want to have anything given to them, which is going to require them to reimburse the government for money that has been paid on their behalf. Okay? And then if things aren’t covered by the government, then things like, rehabilitation therapies, counseling, things like that, housing in certain cases can be covered by a special needs trust.

[00:09:40] Number four thing to consider with regard to special needs trusts, who is going to be your trustee? What is the criteria for choosing a trustee? And I just did an episode on this. If you have not listened to the episode on the criteria for choosing a trustee or executor, go back and listen to that, I’m not going to get into it too [00:10:00] deeply.

[00:10:00] The number one requirement or qualifier for a trustee or manager of a trust is integrity. Right? We want them to be the one that everyone thinks is the most honest and virtuous and then has the most integrity of anyone that they know when they think of integrity, they think of this person.

[00:10:21] So, go back and listen to episode when you’re thinking about trustee. I think it’s number 18 or 17 and enjoy, it’s should be pretty good, we’ll see, maybe you like it, I don’t know. Anyway, this trustee in a special needs setting, though, you want to really make sure that this trustee is a decision maker and the reason why is because they have discretion.

[00:10:43] Everything comes out of this trust based on what the trustee thinks is appropriate. There’s no requirement to give this special needs beneficiary any money, right? This trust could sit there and Johnny could be perfectly happy and he’s getting everything paid for, and there’s no reason for him to get anything from this trust.

[00:10:59] Maybe [00:11:00] he goes on a vacation once in a while, maybe he gets those records that he’s been collecting. You know, he gets an a record player, a little stereo speakers, I don’t know. If he likes live music, he wants big speakers, he wants to be able to feel that music from the record.

[00:11:13] So maybe, Johnny’s got a nice stereo system that the trustee bought for him with a special needs trust. Maybe he takes them to the record store every so often, right. To get him some new records, maybe he’s into cassettes, I don’t know. If he’s old school, maybe he wants a cassette, if he’s super old school, he’s wants the records anyway.

[00:11:32] So, this trustee has to make decisions. Okay? He’s got to make decisions for the benefit of the beneficiary and use his discretion and not put the beneficiary in jeopardy of losing benefits. Okay?

[00:11:45] These trust number five, these trusts can be customized. Okay? We want to tailor the special needs trust to the specific individuals needs, right? Oftentimes, we’ll make these trusts where, say there’s an individual in a state that’s a child [00:12:00] and they’ve got some issues, they may not have special needs, like, you know, they don’t have a diagnosis of what you might think of as a special needs person who is definitely eligible for benefits, right?

[00:12:12] They don’t have a mental disability or something like that or a physical disability, right? That they can’t work, you know what I mean? So, it could be someone that maybe has a drug problem and so we want to make sure that special needs just can be used for people with substance abuse problems, I do them all the time for kids.

[00:12:29] Well, maybe Johnny is, you know, doing well when he’s off drugs, but he’s just can’t stay off the drugs, right? Maybe he’s going to too many concerts, I don’t know. Anyway, Johnny’s got all these hobbies, and he’s getting bad habits. We’re gonna get past that though, we’re getting past these bad habits for Johnny. Okay?

[00:12:50] Anyway, so Maybe Johnny can’t stop doing whatever, ecstasy, I don’t know. Whatever he’s getting into maybe he’s moving into harder drugs, that would [00:13:00] probably be the reason that he’s having special needs issues.

[00:13:03] So he’s maybe into maybe addictive substances and his parents say, well, I don’t want to give Johnny anything, but I want him to have hope that if he gets off drugs, I want him to be able to use this money like a normal trust would allow him to use not completely discretionary on the trustee.

[00:13:17] Maybe I’ll have a trustee in there to hold his hand, make sure he’s okay. Make sure he doesn’t take all this money and go kill himself with a drug overdose or something like that, which is a fear, a common fear of these individuals. And so, we’ll do a trust where, well, if he’s passing his drug tests and he’s living clean and working and we’ll help him without as much restriction, but if he’s back on drugs are, if he’s back in his circling addictions, he’s back to the special needs side.

[00:13:47] And so, we want to craft the trust so that it makes sense for Johnny’s particular interest. There’s Johnny in this situation, Johnny’s lots of different people in this episode.

[00:13:56] Anyway, we want to allow that there’s discretionary [00:14:00] distributions in there for certain things, right? That maybe Johnny loves and maybe the things that we want to make sure that he does right to get off of whatever substances he might be on, maybe some counseling, right? Okay. Rehab type support, those kinds of things.

[00:14:16] Number six thing to consider with your special needs trust planning is how to integrate that trust with the rest of your estate plan.

[00:14:22] And so, you want to make sure when you have an estate plan, we’ve talked about this. You want to have your will and you want to have your power of attorney documents. You want to have your healthcare directives, oftentimes you want to have your revocable trust as your main document to avoid probate and all those things.

[00:14:37] These special needs trusts don’t act in a vacuum. Okay? So if you’ve got this child, Johnny, who’s got some kind of a disability, where he might need to be on disability, social security disability for the rest of his life, and maybe he needs to be on Medicaid for insurance, you want to create that special needs trust as part of your plan, so that his share of the trust goes into the special needs trust, it’s [00:15:00] managed by a trusted person with the utmost integrity and honesty and decision making prowess.

[00:15:07] And he’s going to help, or she is going to help Johnny manage this trust. Okay? And the money that he receives from you as his parent or grandparent or uncle or brother or sister is going to be used for his benefit. Okay?

[00:15:23] And so, putting that special needs trust as part of the plan and making that plan cohesive with regards to how things are going to flow is really critical.

[00:15:33] And tied into that would be number seven here is, we want to tie in third party or family contributions to Johnny. The special needs individual to the special needs trust that you’ve created.

[00:15:46] So if you have a special needs child and the grandparents are like, well, we want to give the grandkids some money and we want to make sure Johnny gets some money so that he can go to college or he can not [00:16:00] have to work all the rest of his life or whatever. Right?

[00:16:02] We want to treat them just like all the other grandkids. Your responsibility is that child’s parents is to say, Hey, mom, dad, grandma, grandpa, uncle Bob, great aunt Sally, hey, I’ve set this special needs trust up for Johnny. Please direct any benefit or any money or inheritance that you might give Johnny into this trust.

[00:16:25] And that makes it so that when Johnny receives money from his grandparents or his great aunt Sally or whoever that he wouldn’t lose his benefits. Okay?

[00:16:33] So make that known to those in your family, those that are close to you, those you think that might give him some money and it will make things better. Okay?

[00:16:41] We want to protect those assets from being having to be spent on completely or from kicking him off any kind of benefits that he is on. Another thing to consider, well, I’m going to get to the other ones. Okay.

[00:16:52] So number eight, we want to make sure that we’re complying with the laws. There’s strict rules, there’s specific statutes [00:17:00] federally and at the state level that regulate these special needs trusts and authorize special needs trusts.

[00:17:07] There’s a ton of different kinds of special needs trust as a third party, special needs trust, which is the kind typically that’s set up by parents or grandparents or brothers or something for the benefit of a special needs individual. So it’s set up by someone other than the special needs individual. Okay?

[00:17:25] So, those ones are pretty straightforward., I’m probably the least regulated of the special needs trust. There’s also the opportunity to create a self settled special needs trust by beneficiaries who are under 65.

[00:17:39] And so, there’s a federal law that says if you’re under 65 and you receive money through inheritance or through, like I mentioned before, like a personal injury award or something like that. I just got a call from another attorney the other day saying, Hey, I just won this money for a special needs individual who was [00:18:00] in a severe accident and he’s got major brain damage.

[00:18:03] But so he won a lot of money, but he’s not able to use it and he wants to make sure that money is protected and he’s able to get his benefits. So we’d have to create some kind of a special needs trust for this individual. Okay?

[00:18:14] That would be a court created special needs trust, actually. And it would basically be a self settled, court created trust. There’s also pooled special needs trusts for people that are over 65 that can’t create their own special needs trust. Often, there’s a thing called a pooled special needs trust. And these are managed by Charitable organizations usually, and they have specific requirements who they’ll let in, but the problem with those types of pooled trust is often the money goes back into the pot for other people, it doesn’t go back to the family. Also with self settled special needs trust, there’s usually a caveat that says, well, you can create this trust, Johnny, if Johnny gets this money and no one planned, he can create, if he’s under 65 or his parent could, or power of attorney could, or somebody like [00:19:00] that, or through the court.

[00:19:00] Johnny, you can create this self settled special needs trust but when you die, we get first dibs on what’s ev, whatever’s left. Okay? So, they say they paid out a hundred thousand bucks and there’s a hundred thousand bucks left in the trust. That goes back to the government who’s paid his benefits, that’s the trade off.

[00:19:18] So it’s better, these third party trust are almost often always better if you can create them and use them properly.

[00:19:25] Another thing to do is make sure that you are still up to date with the rules. You want to review, like any other estate plan, you want to review these things regularly. You want to make sure that the rules haven’t changed. You want to make sure that the trust that you have in place is still good.

[00:19:39] It’s not a bad idea also to have a trustee protector ,sometimes a trust protector that can maybe name a successor trustee or maybe name someone who can name a successor trustee. If you don’t like the one that you put in there. Right.?

[00:19:53] And make sure that there’s successors name behind this person with the utmost integrity, because that person might not be around. You might be 90 years old [00:20:00] or something, so consider those kinds of things. Listen to that episode about trustees, it’s important.

[00:20:05] And finally, the number 10 thing to do with a special needs trust is not to do it yourself. I haven’t seen, I haven’t really researched this. I did a do it yourself estate planning episode a while back. And I looked into like, can you do a will plan and what do you get? And could you do a trust plan? What do you get? You can do those kinds of plans, like a simple revocable trust or simple will, and you might be okay, right?

[00:20:30] You might be okay if it’s simple enough, but special needs planning, you’re going to want to have a professional. This is like going to the neurosurgeon instead of the general practitioner. Right? Or you know, for the surgery, right? You want to go to someone that specified that has experience dealing with special needs planning.

[00:20:48] You don’t want to go to a generalist for this, you want to go to a specific estate planning attorney or even an attorney that specifically focuses on special needs planning.

[00:20:57] And so, don’t rely on yourself to do this, don’t rely on [00:21:00] forms that you find online. Go to a professional because they’re going to help personalize this plan, they’re going to help make sure that this plan is the right choice, that this trust is the right structure, right?

[00:21:10] That the right elements are in there, that the right things are in there so that if something happened to Johnny, the trust wouldn’t blow him up as far as benefits go, wouldn’t kick him off his benefits, talk to a professional.

[00:21:22] So, that brings us to our story time for this episode. And I thought, you know, I’ve done a lot of special needs trust. I’ve done a lot of special needs planning. I’ve done self settled special needs trust. I’ve done special needs trust created in probates through the court. I’ve done a lot of third party special needs trust by parents or grandparents or brothers or sisters for the benefit of other beneficiaries in their family.

[00:21:47] I thought of this story, as an example for today’s episode, it’s about a mom who older gal right in her seventies. She had a house, she had pretty decent savings, [00:22:00] she had one child who had special needs. This was a child who had special needs, he was sort of developmentally delayed, but he also had some major decision making issues, major trust issues and he also had some addiction problems.

[00:22:15] And so she died, this mom and there was nothing in place. No trust, no will, no nothing. So this adult man who was special needs was trying to navigate this whole thing by himself. And he was not able to completely do it. Thankfully, his aunt stepped in to sort of help through this process.

[00:22:36] And I’ll tell you, basically this guy was giving away money, he was giving away assets to these randoms. He almost gave away this property that he inherited from his mom in a terrible deal. I almost blew up a deal, another deal. It was a fiasco.

[00:22:50] Anyway, his aunt stepped in and said, I’ll help you, Johnny. In this case, it’s always Johnny, I’ll help you manage this. I’ll do this probate for you, she had to open [00:23:00] this probate and as part of the probate we have a process in Washington where we can create trusts. We can change distribution through a statute called the trust estate dispute resolution act.

[00:23:13] And so we created this trust out of this probate to put his share in so that he wouldn’t lose his benefits. And so, or and he’d be able to gain benefits. He was on social security disability. I don’t know that he was on Medicaid at the time, but I think he was working on getting that way. And so, this aunt came in and saved the day basically through creating this trust through the court for his benefit, for Johnny’s benefit.

[00:23:35] So can be done after the fact, but it’s a lot harder and it’s a lot more money and it’s a lot more uncertain because if you get in with the wrong people, it might be too late.

[00:23:46] It might be too late if Johnny would have basically sold this house and started blowing all the money. Maybe he’s on drugs, maybe he’s giving it to people that he thinks he trusts that are just using him, right?

[00:23:59] They’re taking [00:24:00] advantage of him and no Johnny’s got this money, let’s go get in there, which is what happened with a substantial part of the estate.

[00:24:07] And so moral of the story, if you have special needs individuals in your family, look into special needs trust planning. They don’t have to be kids, they could be your brother’s kids, they could be your sister’s kids, they could be your uncle’s kids. Right?

[00:24:23] Talk to someone, if you’re hearing this episode, tell someone in your family or a friend group, if they have a special needs individual that they need to start thinking about that or ask them, Hey, have you dealt with this before? Have you ever heard of the special needs stress? I heard this episode about special needs stress from this guy, James Jones. It’s worth it. Okay?

[00:24:40] So that’s it, that’s all for today’s episode. We’re not going to be talking about Johnny anymore. Hopefully Johnny can be mellow and listen to his records. Maybe he checks out some concerts this summer and his trustee, this most honest and person full of integrity will make sure that he’s getting there, I’ll leave you with that.

[00:24:59] So I’d like to [00:25:00] thank you for listening to today’s episode of Legacy Talk. If you liked today’s episode and would like to learn more, please like, and subscribe for more great content. I’ve been your host, James Jones, to your legacy.