Three Mistakes to Avoid with Special Needs Trusts
Special needs trusts are an immense benefit to folks with a disability. They protect assets from most taxes and help preserve eligibility for government assistance. That said, they must be set up properly or they can cause more damage than good to the recipient, something no one wants. As you work with your special needs estate planning company, make sure they don’t commit these 3 mistakes in setting up your or a loved one’s special need trust fund.
A Mandatory Distribution Clause
A mandatory distribution happens when income is distributed to a beneficiary and considered unearned income by SSI and Medicaid. If the distribution is less than the SSI payment, the SSI payment is reduced by that amount. If the distribution is more, SSI is lost and if Medicaid is tied to SSI, that is lost too. In this case, the problem is that the trustee has to maintain full distribution authority, which protects both the benefits and the income amount. With a mandatory distribution requirement, they don’t have that full discretion.
Not Making the Trust Irrevocable
In a first-party special needs trust, the document establishing the trust must stipulate that the trust is irrevocable. If it is revocable, it is considered an available asset to the beneficiary and all government assistance is automatically suspended. A third party trust can be revocable, but the grantor can only revoke the trust until their death or if the trust is funded by another party.
Lacking Sufficient Funds
This happens when parents have a child with a disability and other children who are healthy and provide for an equal distribution in their will for all their children. The even split remains static, whether it’s enough to fund the trust for the person with a disability or not. The special needs estate planning agency used is powerless to put more funds from the parent’s estate into the trust fund and over time it’s depleted to the point it no longer can provide adequate funding for care for the beneficiary.
This can be avoided by allocating different percentages to each child once the cost of care for the disabled child is established. It also can be addressed via a life insurance policy that is structured as “second-to-die.” These two strategies can be used in tandem to ensure adequate funding for the disabled person.
These are three common mistakes that are made when setting up a special needs trust. They are a good reason why a special needs estate planning company should be used to set up the trust and if possible, oversee its management.